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https://world.einnews.com/article/346416414/1DVWMPBFN0l9fjie
This is part 3, you can get to parts 1 and 2 once in the article.
5 parts in all. All should read this a couple of times.
There needs to be an outcry, and unified outcry to ban this naked shorting. The foreign bank USB is providing the other side of the trade through their hedge funds passing on the empty bag to their clients who have not a clue what is going on.... like most of us.
So when these stocks tank, many many times they are pushed off the cliff. Sometimes the company knows what is going on and sometimes they don't. They win we lose. Why trade this shit if the playing field is not level?
Italy to ban naked short-selling on stocks
Published: Friday, 11 Nov 2011 | 6:33 PM ET
MILAN - Italy announced a ban on naked short-selling of stocks on Friday, in a bid to reduce market volatility due to the worsening euro zone debt crisis.
Market regulator Consob said on Friday it would ban naked short-selling on the whole regulated stock market from midnight, December 1, in a bid to reduce market volatility due to the worsening euro zone debt crisis.
The move came as it also extended a ban on short-selling on financial stocks until January 15, 2012, a day after France extended its own short-selling ban on the shares of 10 financial institutions by three months.
Bans on short-selling were introduced earlier this year to discourage speculative trading on financial institutions after Italian and French banking stocks took a beating last summer.
Short-selling is the process through which an investor borrows shares and sells them on the expectation their price will fall and they can be bought back at a lower price.
In a naked short sale, the investor has not borrowed the share, but still bets on a drop in the share price.
Consob added it would continue to coordinate with other European market watchdogs to assess future action, which may include lifting the ban if market conditions allow it.
At present France, Italy, Greece, Spain and Belgium have short-selling bans in place.
Other major stock markets, including Britain, have refrained from imposing short-selling curbs.
Copyright 2011 Reuters. Click for restrictions.
http://www.cnbc.com/id/45259855
DOJ Going After 'Naked Shorts'
January 15, 2010
Exclusive: U.S. Attorney General's 5,000 DOJ Pending Indictments Targeting Financial Fraud, And National Security.
http://www.familysecuritymatters.org/publications/id.5273/pub_detail.asp
e
Jul 8, 2009, 1:37 p.m. EST
Senators press SEC to rein in naked short selling
Kaufman wants agency to take action on hedging abuse, or he may take action.
WASHINGTON (MarketWatch) - A senator with close ties to the White House and hands-on experience in stock trading is leading the push to have the Securities and Exchange Commission take action against naked short selling, an abuse that he and other lawmakers argue was a key contributor to the financial crisis.
http://www.marketwatch.com/story/senators-push-sec-to-reign-in-naked-short-selling
e
From 04 to Current - great read.
http://www.deepcapture.com/
emit...
Cramer confesses:
Extra3/23/2007 4:30 PM ET
Jim Cramer: Here's how to cheat
The popular CNBC host, a former hedge fund manager, could draw scrutiny from federal regulators after telling an interviewer about methods for manipulating the stock market.
Stock market commentator and CNBC television host Jim Cramer has raised eyebrows after describing illegal activities used by hedge fund managers to manipulate stock prices.
In a December video interview on the Web site of TheStreet.com (TSCM, news, msgs), a financial news company he co-founded, Cramer, while never saying he used such tactics himself, described how it was possible to push stocks higher or lower at his previous job running a hedge fund.
The interview, which has received widespread attention only after being posted to online video site YouTube, may be studied by government and stock market regulators, said hedge fund experts and legal sources.
Cramer: It's a fun, lucrative game
The interview described methods, including tactical buying, shorting and using options, to create an impression in the market that could prompt other traders and investors to buy or sell a stock.
"A lot of times when I was short at my hedge fund . . . meaning I needed (a stock) down, I would create a level of activity beforehand that could drive the futures," said Cramer. "It's a fun game and it's a lucrative game."
Cramer, host of the popular CNBC television show "Mad Money," described other tactics that could be used to drive down technology stocks such as Research in Motion (RIMM, news, msgs) or Apple (AAPL, news, msgs) to make them cheaper to purchase later. CNBC is owned by General Electric (GE, news, msgs).
In the interview, Cramer said a hedge fund manager's favorite tactic is to get a rumor about a stock to an unwitting reporter -- at The Wall Street Journal or at his current employer, CNBC -- and hope that it moves the stock in the direction the manager wants.
Cramer said some tactics are "blatantly illegal" but sometimes essential for poorly performing hedge funds.
Cramer said if a market participant wanted to get shares of a company like Research in Motion lower, then he should first get investors "talking about it as if there is something wrong with RIMM. Then you call the (Wall Street) Journal and get the bozo reporter in Research in Motion and you would feed that (rival) Palm's (PALM, news, msgs) got a killer it's going to give away," he said. "These are all the things that you must do on a day like today and if you're not doing it, maybe you shouldn't be in the game.
"It might cost me $15 million or $20 million to knock RIMM down but it would be fabulous because it would beleaguer all the moron longs who are also keying on Research in Motion," Cramer said.
He also said the Securities and Exchange Commission does not understand some illegal activity.
Challenging financial regulators?
Hedge fund lawyer Ron Geffner of Sadis & Goldberg called the interview a "somewhat surprising confession to make publicly, which definitely invites suspicion by regulators."
"Whether he violated the law is unclear," Geffner said. "That is dependent on his trading records. But it's clear that he seems to be challenging regulators to come and examine him."
A spokesman for the SEC declined to comment on whether the agency is looking at Cramer's comments. A decade ago Cramer faced an SEC investigation over a column he wrote for SmartMoney magazine that touted four stocks without disclosing his holdings in them. He was eventually cleared of wrongdoing, according to news reports.
Other legal experts criticized Cramer's comments for suggesting that stock manipulation is widespread among the growing legions of hedge funds, which are investment vehicles that typically trade much more actively and use more complex strategies than mutual funds.
"This makes it sound like everyone is doing it, and the reality is that most hedge funds are not engaged in this kind of manipulative behavior," said Laurel FitzPatrick, a hedge fund lawyer with Ropes & Gray.
Cramer could not be reached for comment following calls to both TheStreet.com and CNBC. Spokespeople for CNBC and TheStreet.com were unavailable for comment.
Cramer said in the interview that he would not make such comments on his CNBC show.
Cramer, who regularly gives opinions on stocks on his daily TV show, also said stock market movements are often unconnected to the fundamental qualities of the underlying company.
"Who cares about the fundamentals?" he said. "The great thing about the market is that it has nothing to do with the actual stocks."
This article was reported and written by Dane Hamilton for Reuters. Hamilton previously worked for TheStreet.com.
the end of faulk? we can only hope.
Well if a company suspects illegal trading of its stock, it will not get any help from SEC. Looks like company will have to investigate by itself.
By Bob Mims
The Salt Lake Tribune
Article Last Updated: 02/15/2007 11:19:32 PM MST
Overstock.com CEO Patrick Byrne can forget about the Securities and Exchange Commission signing on to his crusade to expose alleged market manipulation.
Concluding a 16-month investigation, the SEC says it will take no action against the target of the probe, Gradient Analytics. The Scottsdale, Ariz., market research firm had been accused by Byrne of colluding with the New York Rocker Partners hedge fund to drive down Overstock share prices.
Although the SEC refused to confirm its decision, Gradient on Thursday made public a letter from the agency stating that the investigation had been closed without any enforcement actions recommended.
"We cooperated fully with the SEC to demonstrate that we have nothing to hide," said Gradient President and CEO Brad Forst. "This decision confirms our resolve . . . to publish true and insightful information, in spite of the efforts of others to deflect attention from their own bad news and questionable business models."
Byrne, whose Salt Lake City online closeout retailer ended fiscal 2006 $97 million in the red, said he was not surprised by the SEC's move. But he added that if the agency cannot find evidence to act, he and his lawyers will.
"We look forward to conducting our own investigation when we get discovery," he said Thursday, referring to Overstock's separate lawsuits alleging market manipulation against
Advertisement
Gradient and Rocker and a host of leading brokerages.
Last week, Overstock fired off a litigious broadside at Morgan Stanley, Goldman Sachs and several other big-name investment firms seeking $3.48 billion in damages related to purported "naked shorting" of the online retailer's stock. Morgan Stanley and Goldman Sachs have declined to comment on the lawsuit and the SEC decision, but financial analysts have criticized Overstock's actions.
Traditional short sellers borrow stock through a broker and hope to profit by selling shares high and later buying them back at lower prices to repay the loan. In naked short selling, traders who try to profit from falling prices sell shares without borrowing stock. Using that strategy, naked short sellers can drive down prices by flooding the market with orders to sell shares they don't have.
Overstock and others - Canada's Biovail Corp. also is suing Gradient - complain the action is not only illegal, but results in artificially lower prices.
Overstock also has an active suit specifically against Gradient, claiming the research firm timed negative coverage of the company with client Rocker's buying and selling of Overstock shares.
Byrne and Biovail dismissed the impact of the SEC's decision. The Toronto-based pharmaceutical manufacturer insisted it "remains confident in the merit of its allegations and of the ultimate success of its claims."
http://origin.sltrib(DOT)com/ci_5238488
E*TRADE Financial Corporation and its subsidiaries (collectively, "E*TRADE)' appreciate
the opportunity to comment on a significant proposal recently issued by the Securities and
Exchange Commission ("SEC" or "Commission") to remove all short sale price tests under
the Securities Exchange Act of 1934 ("Exchange ~ c t " ) . ~ E*TRADE commends the
Commission for its past efforts regarding short sale regulation and for its decision to issue the
current proposal. Our general view is that short selling enhances market liquidity and
contributes to stock pricing efficiency, and thus is an important part of our securities markets,
and that the existing restrictions on the execution prices of short sales ("price test
restrictions") inhibit the free-market price discovery mechanism of an efficient market.
Accordingly, we fully support the Commission's proposal to eliminate the current price test
restrictions.
This proposal is a result of the many years of experience by the SEC on the operation of price
test restrictions for short sales, the amendments to Exchange Act Rule 10a-1to add various
exceptions, and consideration of numerous written requests and granting exemptive relief
from its re~trictions.~ Most importantly, the Commission's Office of Economic Analysis has
http://www.sec.gov/comments/s7-21-06/s72106-29.pdf
U.S. SEC seeks to curtail investor suits:
NYT Tue Feb 13, 3:50 AM ET
NEW YORK (Reuters) - The U.S. Securities and Exchange Commission has taken steps on two fronts to protect corporations, executives and accounting firms from investor lawsuits that accuse them of fraud, the New York Times reported in a story published on Tuesday.
Last week, the commission filed a brief in the Supreme Court urging the adoption of a legal standard that would make it harder for shareholders to prevail in fraud lawsuits against publicly traded companies and their executives, the paper said.
At the same time, the agency's chief accountant told a conference that it was considering ways to protect accounting firms from large damage awards in cases brought by investors and companies, the paper said.
Christopher Cox, the commission's chairman, said in an interview that both efforts were in the best interests of investors, because they aimed at preventing the accounting industry from further consolidation and at limiting what he called "fraudulent lawsuits," including some he said were filed by "professional plaintiffs," the Times said.
The SEC was not immediately available to comment.
http://news.yahoo.com/s/nm/20070213/bs_nm/sec_dc_1
By: jcline
13 Feb 2007, 09:55 AM EST
Msg. 337553 of 337559
Jump to msg. #
Universal Express’ Response to First Call
NEW YORK--(BUSINESS WIRE)--Universal Express Inc. (OTCBB: USXP), today responded to First Call’s removal of a posted and announced recommendation and target price from its report on USXP.
“The depth of corruption insidious in this naked short selling scandal has just exposed itself once again. Are market makers, brokers or hedge funds short this stock in excess of 20 times its outstanding shares now afraid of free speech and free analyst opinions? Why a removal without an explanation? Damages and malfeasance towards our Company and its shareholders will always be defended by our Company,” stated Richard A. Altomare, President and CEO of Universal Express, Inc.
“The facts remain simple. An analyst report summary appears from First Call on its website. We verify and we announce. Then two days later the recommendation and target price mysteriously disappears from the report with the cryptic comment ‘No analyst consensus’,” continued Mr. Altomare.
“Who couldn’t afford or allow to have Universal Express’ future stock price evaluated and grow? Was it selected brokers, market makers and other Wall Street interests who wallow their gluttony through the naked shorting scandal at the expense of ordinary investors? Was it conflicted persons at a regulatory agency? Was it related to our long-term public position on the naked short selling scandal and against those responsible for naked short selling, being permitted in America to rob the middle class of the value of their investments while ruining thousands of public companies for more than ten years?” concluded Mr. Altomare.
“Universal Express will meet with its attorneys to commence appropriate litigation against First Call,” stated Chris G. Gunderson, General Counsel of Universal Express.
“There appears to have been a great wrong perpetrated against our Company ranging from the gross and reckless negligence of First Call to a possible deliberate attempt to harm our Company by insidious interests.”
“Universal Express has received more than $700 Million in jury awards against naked shorters and is not afraid to defend its rights and the interests of its shareholders. I am confident that our litigation against First Call and our ultimate success will right these wrongs with a judgment of appropriate valuation,” concluded Mr. Gunderson.
About Universal Express
Universal Express, Inc. is a 23 year old logistics and transportation conglomerate with multiple developing subsidiaries and services. For additional information please visit www.usxp.com
Safe Harbor Statement under the Private securities Litigation Reform Act of 1995: The statements contained herein, which are not historical, are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements including, but not limited to, certain delays beyond the Company's control with respect to market acceptance of new technologies, products and services, delays in testing and evaluation of products and services, and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission.
http://home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&newsId=20070212006...
Continued.....
Their complaints, and consequently the subcommittees investigative efforts, have focused on questions of improving the short-selling mechanism and curtailing related abuses, so that short selling can most effectively serve its legitimate function in the market.
III. Abuse and Manipulation By Short Sellers
A. Credibility of Abuse Allegations
The subcommittees investigation of short selling has included extensive review of the allegations of short-seller abuse offered by affected issuers and investors or reported in the press. In addition to the widespread press reports, allegations of abuse were reported by witnesses in the subcommittees hearings, by issuers who responded to the subcommittees questionnaire, and by other issuers and investors in numerous unsolicited off-the-record contacts with the subcommittee. The subcommittee did not, however, attempt independent verification of their accuracy through field investigation.
Because of the lack of independent investigation and verification, the committee has not made any findings that certain of these allegations were conclusively demonstrated to be true. The committee cannot, therefore, report documentation of specific incidents of abuse by short sellers.
The committee has found, however, that many of the reports of rumor-spreading abuse are entirely credible and are strongly suggestive of abuse. Moreover, the widespread nature of these reports and the high degree of similarity among them constitute a highly consistent pattern. The committee finds, therefore, that a pattern of abusive and destructive rumormongering, targeted specifically at companies in the equity securities of which some short-selling investors have established major short positions, appears to be occurring.
Other reports have alleged direct price manipulation or other trading abuses by short sellers in the trading of target companies shares. Many of these reports have alleged that certain parties were engaging in naked short selling, presumably with the cooperation of a major broker or dealer.
None of the reports of naked short selling were supported with direct evidence, and in its evaluation of these reports the subcommittee found the circumstantial evidence offered to be inconclusive. The charges of naked short selling do raise important questions of the proper functioning of the markets, however, and the subcommittee has therefore initiated a study of clearing and settlement delays and their relationship to short selling, as reported previously.
This study has not been completed, but the evidence examined so far suggests that naked short selling or its functional equivalent does occur in large volume in some equity issues. The committee does tentatively conclude, therefore, that the reports of naked short selling offered by issuers and other investors, while lacking direct supporting evidence, may nevertheless be true in some instances.
Other allegations of direct price manipulation by short sellers have appeared to the subcommittee to lack substance. For this reason the committee has concluded that, aside from the reports of spreading false rumors and engaging in naked short selling, many of the complaints about short-seller abuse are not soundly based and may reflect a misunderstanding of the short-selling process.
b. the psychological environment
The committees principal concern in its evaluation of short-selling issues has been broader than just whether specific abuses and violations have occurred and are being regulated. The committee is particularly concerned with whether:
a. The equity market functions fairly for investors who invest in the shares of companies that are actively sold short by other investors; and
b. Whether the equity market prices such stocks efficiently and appropriately so that these companies will continue to have access to the market for new capital on a sound and fair competitive basis.
The committee has found, in this connection, that the fairness and efficiency of the equity market for stocks that are actively targeted by short sellers suffer from serious disturbances that cannot be attributed solely to specific instances of short-seller abuse.
The pricing and trading of individual equity issues are highly dependent on subjective elements of psychology and perception among investors generally, and the committee finds that many investors and issuers have a perception that short sellers have great manipulative power over stocks. Moreover, the committee finds a widespread perception, expressed in many ways to the subcommittee, that the SEC is indifferent to the manipulative activities of the short sellers and assists them indirectly by their attitude of indifference.
The psychological environment is further affected by the fact that major short-selling investors function entirely anonymously. Under present reporting rules it cannot be known, except through a special investigation by the SEC, the exchanges, or the NASD, who is holding the major short positions in a particular stock.
The committee finds a strong undercurrent of disillusionment with the public equity markets and with the SEC in the viewpoints expressed by many investors and issuers whose shares are targeted by short sellers. Among these investors and issuers there appears to be a sense of being victimized by powerful but unknown abusers who do their will without restraint from any regulators. If these were isolated views, they might not be significant, but the committee finds them sufficiently prevalent to constitute a troubling pattern.
In some instances, as reported previously, the targets of short selling appear to have drawn conclusions about the manipulative power of short sellers without a solid factual basis, but this tendency of many investors to draw such unfounded conclusions is the fundamental reason for concern about the psychological climate.
The fact is that some short-selling partnerships possess very substantial financial resources and a capacity, financially speaking, to influence heavily or even dominate the trading activity in a small capitalization issue of stock over an extended period of time. When this general fact is combined in the minds of company executives and shareholders with the information that some unknown but presumably powerful party or parties is or are actively short selling a particular stock and when these executives and shareholders also share a conviction that the SEC ignores abusive practices by the short sellers and does not ensure a fair market it is readily understandable that these executives and shareholders of the affected issuer may reach exaggerated and ill-founded conclusions about the short-selling "threat." When such exaggerated reactions to active short selling become frequent and persistent, as the committee believes they have in many stock issues, then pricing efficiency and market fairness suffer.
Moreover, the impairment of pricing efficiency affects not just the immediate targets of short sellers but the entire class of firms, many of them small but some large as well, that are viewed in the investing community as potentially vulnerable to short-seller abuse. Given the perceived power of anonymous short sellers to manipulate the market, it is only ordinary prudence to many investors to avoid such issues altogether, which in turn unjustifiably depresses the pricing of such issues relative to others perceived as less vulnerable.
This analysis of pricing inefficiency would not be valid if short sellers do in fact possess the great capacity to manipulate prices and hurt companies that is widely attributed to them. That is, if these investor evaluations of the short-selling threat are soundly based and relatively accurate on average (i.e., statistically unbiased), then the resulting effects on pricing could be compatible with efficient market functioning. The foundation of this analysis of probable pricing inefficiency is that, on the contrary, the psychological environment surrounding short selling has led investors to systematically overestimate the manipulative power of short sellers. Although there appear to have been some cases of serious abuse with a potential for significant price distortions on individual issues, the committee does not believe, as a general matter, that short sellers possess the extraordinary manipulative power that is widely attributed to them.
This is precisely the environment in which improved public information is clearly needed. While not necessarily providing a complete solution, better public information is the natural first remedy for such difficulties. By injecting factual clarity, it reduces the scope for fear based on imaginative speculations and unfounded assumptions. The issue of improved public information is discussed in Sections IV and V below.
C. The American Stock Exchange Surveillance Report
In 1987 the American Stock Exchange received complaints from three companies that holders of short positions were engaged in downside manipulation of the companys stock. Each company reported that it was the target of malicious negative rumors which, it felt, were being spread by the short sellers as part of a scheme to depress the price of its stock. In addition, many negative press stories had appeared about these companies, notably in Barrons.
The American Exchanges Surveillance Department conducted investigations into the short selling of each companys stock. It compiled detailed trading data on these companies stocks for certain study periods that ranged from 3 to 12 weeks and attempted to determine whether any of the short sellers had engaged in price manipulation in their trading during the study periods.
The trading data compiled in the investigation and the Exchanges findings were reported to the SEC. In each case, the Exchange concluded that none of the information it gathered revealed evidence of manipulation by short sellers. However, it stated that it could not determine whether certain principal short sellers had acted in concert. Moreover, since most of the principal short sellers were not members of the Exchange and therefore not subject to the Exchanges jurisdiction, it stated that the Exchange could not do a thorough investigation of the short-sellers activities. It submitted the report to the SEC with a recommendation that the SEC should further investigate the activities of the short sellers to determine whether the short sellers had acted in concert to depress the stock prices.
The Exchange also made a limited attempt to evaluate the companies claims of false rumors, but this work did not represent a thorough investigation. In its report the Exchange concluded that the charges of false rumors were a subject for the SEC to deal with. In particular, it recommended that the SEC should determine whether there had been any improper contact between the short sellers and the press.
The SEC did some additional investigation after it received the surveillance report. This included contacting the companies and the stock analysts that followed the companies, as well as searching various databases for negative articles or other information about the companies. Although it found negative articles from its database searches, the SEC said it did not find any articles which contained materially false information about the companies. In describing its response to the American Exchanges recommendation for further investigation, the SEC stated to the subcommittee that it found no indication of illegal activity by the short sellers in these cases and, moreover, that the SEC had brought action against one of the companies involved for improper accounting methods.
The subcommittee found, on close study of the Exchanges surveillance report, that the report contained both statistical discrepancies and unexplained information gaps. When questioned, the Exchange attributed the statistical discrepancies to human error but was unable to explain why certain information requested from one broker was never received. More importantly, the study periods selected by the Exchange for the three stocks did not correspond to the months when the reported short interest for these stocks was highest, or to the build-up of the short interest figures to their highest levels. Moreover, in the case of two stocks, high volume trading days occurred in the week immediately prior or subsequent to the study periods but were excluded from the study periods.
Finally, the Exchanges evaluation of the extensive trading data that was assembled lacked focus. It was never clearly stated what pattern they were looking for or what pattern would have raised concerns about manipulation. For this reason and because of the inadequacies cited above, the committee, while acknowledging the extensive effort of the Exchange, questions the effectiveness of its surveillance examination.
Moreover, the inadequacies found by the subcommittee should have been evident to the SEC but apparently were never detected. The committee finds, therefore, that the SECs response and followup to the American Exchange surveillance report were superficial and did not represent a serious effort to investigate the company charges of manipulation by short sellers.
D. The Role of the SEC
The Securities and Exchange Commission is responsible for enforcing the antifraud and antimanipulation provisions of the securities laws, and agency witnesses testified in the subcommittees hearings that the agency performs this responsibility vigorously when evidence of illegal behavior by short sellers is brought to their attention. In support of this the agency testimony cited certain enforcement cases brought by the Commission where the behavior of short sellers was challenged.
Other witnesses questioned the adequacy of the SECs efforts to control short-seller abuses, however. Moreover, several company officials have told privately of bringing complaints of short-seller abuse to the SEC without any apparent SEC action resulting. Some company officials even reported to the subcommittee that, after they brought their complaints to the SEC, the SEC turned around and investigated their own companies groundlessly for suspected accounting fraud, public disclosure violations, or other matters, without ever bringing formal charges.
The SEC has never, as far as the committee is aware, brought an enforcement case or even sought seriously to investigate a case in which the central allegation of abuse was the malicious dissemination of false or unverifiable negative reports about a public company, its officers, its products, or other matters that, if true or believed by investors, would be likely to influence negatively the trading price of the companys stock.
For this reason, the committee finds substantial basis for concern that the SECs policing of the fairness of the markets in this respect may not be adequate.
The committees concern regarding this aspect of the SECs enforcement program is further heightened by the prepared testimony of Mr. Sturc for the SECs Division of Enforcement. In explaining why the SEC has not found it practical to bring enforcement cases against short sellers in most instances, he stated:
Finally, many of the complaints we receive about alleged illegal short selling come from companies and corporate officers who are themselves under investigation by the Commission or others for possible violations of the securities and other laws. When there is an obvious economic justification for short sales, it is extremely difficult to prove: . . . (ii) the material false statement/omission and fraudulent intent requirements of Rule 10b-5. This is particularly true in those situations where, for example, our investigation tends to show that at the time when short sellers were allegedly disseminating false rumors, in fact, the issuer was disseminating materially false financial statements.
This statement by Mr. Sturc has the appearance of a de facto "no-action" assurance to short sellers concerning any actions they may take to disseminate false rumors about companies that are the object of SEC fraud investigations. Moreover, since the SEC does not bring formal charges against the company in many of the cases where it initiates an investigation, this statement represents a policy of ignoring possible cases of abuse by short sellers on the basis of unproven and potentially untrue suppositions about company behavior. The committee finds this policy very disturbing.
Finally, the committee finds that there has been an uncomfortably close direct working relationship between certain unknown short sellers and the SEC enforcement staff. Mr. Sturc acknowledged in the subcommittee hearing that the SEC staff "listen" when short sellers make allegations that a company is doing something wrong, because the short-sellers information is often accurate. Short sellers, in other words, frequently provide useful enforcement tips to the SEC staff.
That the SEC staff does frequently act on the tips provided by short sellers may also be inferred from a statistical survey the subcommittee staff conducted, with SEC cooperation, of SEC investigations of NASDAQ companies for accounting fraud or other fraudulent public disclosures during the period March 1989 through March 1990. During this period 24 percent of the formal investigations opened involving NASDAQ companies, and 17 percent of the informal investigations opened involving NASDAQ companies, were investigations targeted at companies in which the reported short interest in the company stock immediately prior to the opening of the investigation was at least 5 percent of the public float in that company’s stock. That is, substantial percentages of all SEC investigations of NASDAQ companies during this period were investigations of short-seller targets.
The subcommittee does not find anything inherently improper in this pattern of enforcement investigations by the SEC. This pattern does, nevertheless, raise a troubling question. The question is whether the SECs selection of investigation targets is biased in a manner that provides unwarranted assistance to the short sellers.
The knowledge in the market that a company is the object of an SEC investigation for possible fraud is generally expected to disappoint or alarm investors and to directly cause a decline in the companys stock price. The opening of such SEC investigations after short sellers have established substantial short positions in the target companies securities is therefore very beneficial to the short sellers. For this reason the SEC needs to exercise extreme caution in opening investigations of short-seller target companies, especially on the basis of tips from the short sellers, in order to guard against any appearance of bias favoring the short sellers.
Regardless of the appropriateness, from an enforcement perspective, of the investigations opened regarding possible fraud by short-seller target companies, the de facto working relationship between short sellers and the SEC enforcement staff has the effect of providing bounties to the short sellers for their enforcement tips when the enforcement investigations become known in the market. In this context, the committee finds it highly improper that the SEC staff should also exempt from any enforcement scrutiny the behavior of the short sellers whose tips they determine to act on, as Mr. Sturc testified.
IV. The Integrity of Information about Company Affairs
Accurate and timely information for investors is essential for a fair and efficient securities market. The unchallenged and unpunished circulation of false or misleading reports about company affairs is very destructive of fair markets. It discourages long-term investors from committing their funds to companies that have been made the targets of information distortions, and in this way it impairs and may even destroy these companies access to the equity market for new capital.
The SEC does not take an evenhanded and balanced approach toward information integrity in the equity market. The SEC vigorously investigates suspected cases of misleading or false information released by company officials about their own companies, which is entirely proper regulatory scrutiny, but the SEC does not employ equal vigor on the other side. The SEC has not committed itself to a policy of suppressing false or manipulative rumor circulation by parties seeking to discredit a company or its officers or products, and it has not displayed any such commitment in practice through its enforcement program.
Small companies are especially vulnerable to campaigns of intentional distortion about their company affairs, for two reasons. First, they lack the resources usually available to a larger company to conduct an expensive information campaign to combat false rumors directly. Second, knowledge of their affairs among the financial press and among securities professionals, who may be able to evaluate false charges critically and render a constructive independent judgment, is generally much less widespread than in the case of large companies.
The SEC should adopt a formal policy and administrative program for improving the integrity of information flows about public companies, especially smaller companies. This program should include a commitment of resources to vigorous investigation of suspected cases of dissemination of false information or of unverifiable information under false pretenses (such as impersonation of company officers or regulatory authorities). The SEC should also evaluate the adequacy of the enforcement authority at its disposal for controlling information distortions about public companies, and should advise Congress of its recommendations for additional authority, if needed.
This commitment by the SEC is needed in part to provide greater confidence to investors that they can commit their funds to investments in small company stocks without excessive vulnerability to abusive information distortion by short sellers. A commitment of this nature by the SEC is needed to dissipate the unhealthy psychological atmosphere, referred to above, that adversely affects the markets for many stock issues in which there is substantial short-selling activity.
V. Market Efficiency and Market Information
a. information about short-sale trading and share expansion
In any asset market, expansion in the supply of a particular asset that investors must hold will normally drive down the price, at least temporarily. Only when there is a perfectly elastic demand for that asset, which is extremely rare in the stock market, will price be unaffected when the supply expands. An abrupt supply change, in particular, can be disruptive if it takes place without prior announcement and without advance preparation of the market.
The distribution of new shares of stock into the equity market through a company offering of new shares represents the kind of supply expansion that can be disruptive if done abruptly without prior warning. For this reason, among others, elaborate disclosure rules have been put in place so that investors are able to be fully informed about what is going on when a company sells new shares in this manner. Investors are thereby able to have a fuller understanding of the factors underlying any price decline or increased trading volume they may see in a stock in which a distribution of new shares is taking place or is planned.
Short selling causes a similar share expansion, as explained above. New investors must be induced to purchase the shares being offered by short sellers, or existing shareholders must be induced to increase their holdings, so that the increased quantity of shares can be absorbed. An unannounced share expansion that arises from short selling can therefore be just as disruptive to market pricing as an unannounced distribution of new company shares would be.
The recent price behavior and trading volume in a stock convey information to other investors in the market. The information that is conveyed is different, however, if new shares are being distributed by short sellers than if existing stockholders are selling their positions.
Shareholders who sell generally do not seek to profit from a further decline in the stock price, and they may not expect any decline. They may merely need cash or may prefer other investments. In fact, if they sell only part of their holdings, then they clearly want the rest of their shares to appreciate further. For these reasons their sales do not necessarily suggest a negative evaluation of the stock.
Short sellers, on the other hand, clearly expect and seek to profit from a decline in the stock price. Their motivations and expectations are different. When short sellers are active, other investors must expect that these short sellers hold a highly negative evaluation of the stock and may drive the price down through further short selling. Short selling, furthermore, has the added significance of expanding the markets total holdings of the stock, which may require a price decline merely to induce new investors to absorb the new shares.
For this reason, investors should have accurate and timely information about all significant distributions of new shares that arise because of heavy short-selling volume. In the absence of this information, investors are presently unable to distinguish between heavy sales by current stockholders and the introduction of new book entry shares into the market through short selling. As a result, they may inappropriately infer that existing stockholders who are reducing their holdings are responsible for an observation of heavy trading volume and a price decline when in fact these are due to a supply expansion caused by short selling.
The present reporting of short interest statistics by the exchanges and the NASD does not supply the necessary information to the market and is entirely inadequate for this purpose. Aggregated short interest data are reported monthly to the exchanges and the NASD by brokers and dealers and are disseminated through the public media several days later, so the net short sales from one monthly reporting date to the next, net of purchases to cover previous short sales, are eventually known. No other data on short selling in individual stocks is available to the market, however. Market participants cannot know, therefore, except on a delayed basis several weeks later, about changes in the supply of an issuers shares through short selling.
These organizations should develop a method for collecting daily short-selling activity and weekly short interest data from brokers and dealers. They should then make this information available electronically to the market in aggregate form.
C. Disclosure of Material Individual Short Positions
Investors who acquire 5 percent or more of the shares of a company must report this fact to the SEC within 10 days, and the SEC filing is made public. However, short sellers who acquire a short position of this magnitude in a companys stock are not subject to any similar reporting requirement. Regardless of how large an investors short position in the stock of an individual company, he or she may remain entirely anonymous.
The subcommittee has received very strong expressions of support from company executives and interested stockholders for the concept of a public reporting requirement for large individual short positions, analogous to the present reporting requirement for investors who acquire 5 percent of a companys shares. Moreover, no substantial opposition to this concept has been expressed to the subcommittee. In the subcommittees hearings, the witnesses for the American Stock Exchange and the SEC expressed reservations about whether disclosure of major individual short positions might have unintended effects on the market and might represent an unwarranted disclosure of proprietary trading strategies, but these concerns were not expressed in a manner to reflect a position of opposition to the concept.
Moreover, as described above in Section III, the committee believes that the psychological atmosphere among investors and issuers regarding stocks targeted by short sellers exhibits a disturbing and unhealthy pattern that may seriously interfere with fair markets and efficient pricing, and the committee believes that the complete anonymity with which major short sellers are now permitted to operate contributes importantly to this unhealthy market psychology.
The committee therefore finds that such a public reporting requirement for large individual short positions is needed, for two closely related reasons. First, the committee believes that stockholders and issuers whose portfolio investments and business activities are under direct attack through the large-scale activities of sophisticated multi-million dollar short-selling partnerships have a right to know who the individual short sellers are in cases where their respective short investments are large enough to be material in relation to the total outstanding shares of the company; and second, the committee believes that the equity market will function more fairly and more efficiently if this information is available publicly.
The committee therefore recommends legislative enactment of such a reporting requirement. Although this reporting requirement might also be accomplished through SEC rulemaking, the SEC has recently stated in its concept release seeking public comment on the suggestion of such a reporting requirement that the agency’s authority to implement such a rule for purposes of market information is not clear. The committee therefore believes that legislation is the appropriate method for implementing this disclosure requirement
SECTIONS OF THE REPORT DEALING WITH THE EFFECT OF SHORT SALES ON PROXY VOTING HAVE BEEN OMITTED.
Continued........
his or her broker is required to return shares that were borrowed at the time of the short sale, as described in the next section.
2. Securities borrowing and lending
Short selling normally requires that the short sellers broker must borrow securities. The purchaser of the shares in a short-sale transaction expects to receive delivery of the purchased shares, or at least the purchasers broker must receive them in order to hold them for the purchaser, but the seller does not have them to start with. The sellers broker must therefore borrow shares to complete the transaction.
Securities lending for this purpose is highly organized, and usually the sellers broker has no problem borrowing the necessary shares, either from other customers margin accounts or from another broker. Occasionally, however, the shares cannot be borrowed, in which case the broker is supposed to refuse to execute the customers order to sell short.
The sellers broker does not actually borrow the necessary shares when the short-sale trade is executed, however. The shares are not borrowed until settlement of the transaction occurs, which is normally five business days later, and this time lag can allow a problem to develop. On the settlement date, the sellers broker may discover that shares are no longer available to be borrowed from the source that seemed to have shares available five days earlier.
If the sellers broker cannot borrow the shares on settlement day, then no shares are delivered to the buyers broker. If the trade is processed through one of the major stock clearing organizations , as most now are, then no shares are delivered to the clearing organization. The short-sale trade is still a valid trade, but the sellers broker is merely late in delivering shares to complete the trade. This appears as a "fail-to-deliver" on the books of the selling broker.
3. Expansion of total beneficial ownership
Short sales of equity shares generally have the effect of increasing the total number of shares of that companys stock owned beneficially by investors. In a short-sale transaction, the buyer adds to his or her holdings of this stock, while no other investor has sold shares he or she owned.
Of course, there is no increase in the shares outstanding shown on the records of the issuing corporation. As a consequence, the short sale creates a situation in which the total number of shares owned beneficially by investors exceeds the number of shares issued by the issuing corporation.
Securities lending by brokerage firms makes this possible. Brokers normally hold shares in custody for their customers, and the customers investment holdings are reported to them on paper account statements from their brokers. When investors borrow money from their brokers on margin, as many investors do, they must sign an authorization permitting the broker to lend their shares or otherwise to pledge them as collateral for bank loans to finance the brokers lending. When a broker uses this lending authority to lend some customers margin shares to a short seller, the broker ends up holding fewer shares of that stock in custody than the number of shares the customers own, as shown on their paper account statements.
The result of such short selling and securities lending, in the aggregate, is that brokers as a group do not hold record ownership of as many shares of such a stock as they and their customers own beneficially. This may be described as a situation of fractional reserve brokerage, where the "reserves" of record shares, of issued shares shown on the records of the issuing corporation, are only a fraction of the beneficially owned shares shown on the account statements of customers and in the brokers own proprietary accounts.
This process of nominal share expansion through securities lending and short sales is very similar in its mechanics to the process of money expansion through bank lending, which is familiar to students of economics. In both cases the public holds a major part of its holdings, its money balances and its securities, in book entry form only, in accounts with intermediary institutions.
In the case of banks, these book entry holdings, the bank checking and savings accounts, show more money in total belonging to the depositors than the banks hold in their vaults or on deposit with the Federal Reserve Banks. The bank reserves are only a small fraction of depositors total bank balances on paper.
The same thing is now happening in securities brokerage firms. The total shares belonging to investors on paper, in their brokerage accounts, exceed the total reserves of registered or issued shares in the custody of the brokers when short sales have occurred.
It is not possible, however, for all investors to convert their shareholdings, as shown in their brokerage accounts, into stock certificates when such a share expansion has occurred. If all investors holding shares of a particular stock in their brokerage accounts tried to convert their holdings into stock certificates, brokers who had loaned out shares to short sellers would be forced to recall the loans to get the shares back. This, in turn, would force the short sellers who had borrowed the shares to buy back the shares in order to return the borrowed shares.
If the short sellers are able to buy back enough shares that is, if enough investors who first wanted stock certificates are willing to sell their shares instead then the remaining investors who do not sell can get stock certificates. In this case, the total shares held by investors will have contracted enough so that it matches the brokers reserves of issued shares in their custody.
However, sometimes short sellers are not able to buy back the necessary shares at a reasonable price, and a short squeeze results. All investors holding this stock are refusing to sell except possibly at a very high price, and when this happens regulatory intervention or court action may be needed to resolve the situation. As long as this short squeeze remains in effect, however, it is not possible for all the investors holding this stock in their accounts to obtain stock certificates for their holdings.
4. Expansion of tradeable shares
The expansion of book entry holdings of shares by investors when short selling has occurred also represents an expansion of tradeable shares in the market. Every investor whose brokerage account shows that he holds a certain stock may sell that stock immediately, regardless of whether his or her broker is holding enough shares in custody on that day to make delivery of all the shares sold by customers from their accounts. The rules of the stock exchanges and of the National Association of Securities Dealers (NASD), which regulates over-the-counter trading, do not place any limits on the entry of sell orders just because a brokers reserves of shares in custody are less than what that brokers customers want to sell.
5. Statistics on short interests in stocks
The New York and American Stock Exchanges and the NASD compile monthly statistics on the aggregate short security positions reported by brokers and dealers. These statistics, which are released to the press and the public, list hundreds of companies whose stock has been sold short in significant volume by investors. Short selling, and the resulting share expansion, are thus very widespread phenomena.
To provide further information on the scale of short selling and share expansion, the subcommittee has compared the short interest statistics reported monthly by the exchanges and NASD with the individual companies total shares outstanding. The purpose of this analysis was to identify cases in which the share expansion through short selling was at least 5 percent of a companys shares. The appendix contains a listing compiled by the subcommittee showing 695 companies for which the short interest in their stock was at least 5 percent of the companys total shares outstanding at some time during the years 1986-90 .
For 280 of these companies the short interest exceeded 10 percent of shares outstanding at its maximum, and for a smaller but still significant number the share expansion through short selling was over 20 percent.
B. Regulation of Short Selling
Short selling is regulated under both Federal agency regulations and under certain rules of the stock exchanges and the NASD.
As described above, the Federal Reserves margin regulations require a short seller to post a certain amount of additional cash margin, and to maintain afterward an appropriate amount of cash margin. This limits the amount of short selling an individual investor can do, based on his or her financial resources.
Certain Securities and Exchange Commission rules set important limits on short selling. SEC Rule 10a-1 (the "uptick rule") prohibits short sales of exchange-listed stocks except on or after a price "uptick." That is, the short seller must find a buyer who will pay at least one-eighth point more than the last sale price, or who will pay the same as the last sale price if the last change in the sale price of this stock was an increase. In theory, this rule is intended to prevent short selling from continually driving down the price of a stock, but evasion of this rule is possible, especially through overseas trading in stocks that can be traded in London, Tokyo, or other overseas markets. Moreover, this rule does not apply to stocks that are traded over-the-counter or in the NASDAQ system of the National Association of Securities Dealers. The NASD has proposed a similar uptick rule for NASDAQ trading, but has not taken final action to implement such a rule.
SEC Rule 15c3-3 sets important limits on the extent of securities lending. Except under special written agreements applicable to a particular stock, a broker may lend out only those customer shares that serve as collateral for the money the customers have borrowed from the broker on margin. The rule limits this to stocks having a value of no more than 140 percent of the amount borrowed. Therefore, if few brokerage customers are holding a particular stock in margin accounts that is, if most investors have paid in full for their holdings of this stock and are holding it in cash accounts or in certificate form then it may be difficult or impossible for brokers to borrow this stock. In this case normal short sales of this stock, in which borrowed shares are delivered to the buyer, may not be possible.
SEC Rule 10b-21 prohibits short sellers from closing out a short position with shares received in a secondary offering of shares by the company. This does not directly regulate short selling itself, but it seeks to control a short-selling abuse in which investors would use short sales to drive down the price of a stock just prior to a new offering of shares, and would then close out their short position with shares obtained in the offering at the lower price they had forced the company to accept.
The New York and American Stock Exchanges and the NASD have rules that require a broker to determine, at the time a customer enters a short-sale order, that the appropriate number of shares are available to be borrowed to cover the short sale. The broker must locate the required shares before executing the short sale for the customer.
The NASD also has recently received final SEC approval of a "buy-in" rule, which provides that a broker whose customer requests a certificate for NASDAQ securities that he or she has purchased must force a buy-in of the necessary shares for cash or guaranteed delivery, at the expense of the sellers broker, if the customers shares are not otherwise received through normal trade settlement procedures. Such a buy-in would typically only become necessary in cases where the broker handling a short sale is unable to borrow the necessary shares for delivery to the purchaser.
The NASD has also proposed, but has not received final SEC approval to implement, a "closeout" rule for short sales. This rule, if implemented, will require brokers, under certain circumstances, to close out customer short positions if delivery of the shares sold short has not been made by a certain number of days after the normal settlement date. There is no similar rule governing the delivery of shares sold short on the New York or American Stock Exchanges.
These rules typically provide blanket exceptions for short selling by exchange specialists and over-the-counter market makers. Specialists and market makers are generally permitted to engage in short selling on substantially more liberal terms than other investors.
C. Subcommittee Investigation and Hearings
1. Company and investor complaints
For years, investors and company executives (who are often major shareholders also) have complained about short-selling abuses. Many recent press reports of abuses, as well as other press features that dispute the reports of abuse, are reprinted in Appendix 9 of the printed subcommittee hearing record.
Many of the complaints have alleged that short sellers, after establishing a major short position in a particular stock, have aggressively circulated false rumors about the companys financial condition, problems with its products, or the health or integrity of its officers in an effort to drive down the stock price. It has also been frequently alleged that some elements of the press assist and cooperate with short sellers by printing very negative stories about the companies the short sellers have targeted.
In many cases short sellers are alleged to have contacted directly a companys major suppliers, customers, lenders, and institutional shareholders, often anonymously or under false pretenses, to aggressively suggest false or misleading "facts" about the company.
Other complaints have alleged that "naked" short selling has been employed to manipulate and drive down the price of a stock improperly. Short selling in which shares are not borrowed and are not delivered to the buyer is called naked short selling. This practice was described in a Forbes article in February 1988 .
Some complaints have been directed at the SEC. The SEC, it is alleged, is "soft" on short-seller abuse and fails to pursue cases of false rumors, even when the purpose of the false rumors is price manipulation. Some complaints have even alleged that the SEC actively assists short sellers by conducting investigations of companies in the stock of which short sellers have accumulated large short investments. These investigations assist short sellers because public announcement of such an investigation often causes other investors to sell such a stock, thereby driving down the price.
2. Survey of companies
In May and June 1989 the subcommittee mailed a questionnaire letter to approximately 200 companies that had had the short interest in their stock reach a ratio of at least 10 percent of their public float of shares at some time in the period from December 1986 through April 1989. (In the case of New York Stock Exchange listed companies, the subcommittee could not obtain float data and therefore compared the short interest of each company to its total shares outstanding.) The letter contained a series of questions asking what practical effect the short selling and the related activities of short sellers had had on the company, whether the company had experienced any disruptions or distortions of the proxy voting process, and how the company felt about three suggested changes in the regulation of short selling. The three regulatory ideas proposed in this letter were (i) mandatory public reporting of their short positions by short sellers if their positions exceed some percentage of a companys outstanding shares; (ii) an uptick rule for short sales of NASDAQ stocks; and (iii) a mandatory buy-in rule to reduce naked short selling.
The subcommittee received a total of 68 responses, for a response rate of about 34 percent. Thirty companies reported no problems or complaints arising from short-selling activity, while 38 reported problems of various sorts. Several of those reporting no problems had very substantial short positions arising from hedging or arbitrage transactions involving convertible securities, but did not feel there was any need to complain.
Widespread circulation of false rumors around the time of heavy short-sale activity was cited by 21 companies as a serious problem. They generally reported that these rumor problems, at the very least, made it necessary for company officials to devote inordinate amounts of time to reassuring stockholders, regulators, customers, and sources of debt financing, who were often seriously unsettled by the reports being circulated.
Thirteen companies characterized the short-sellers activities as involving improper interference with their relationships with customers, major shareholders, suppliers, banks, etc. Generally they complained of numerous phone calls, often anonymous, to these parties from "analysts" attempting to suggest very negative, frequently false, conclusions.
Only a small number of companies asserted that naked short selling was a significant problem. Most companies responded that they had no factual basis for determining whether naked short selling was a problem because they could not obtain the necessary data from their exchange or the NASD.
No companies reported any complaints related to shareholder proxies.
Many companies that reported specific complaints also expressed the view that short selling is a legitimate market practice and that the only need is to curb specific abuses.
Out of the 68 substantive replies received, 37 commented in some manner on one or more of the three policy ideas suggested in the letter. Public reporting of large individual short positions was supported in 32 of the responses and opposed in 2. Imposing an uptick rule for short sales of NASDAQ stocks was supported in 22 responses (13 from OTC companies), and opposed in 3. A mandatory buy-in rule or some other step to prohibit naked short selling was supported in 34 responses and opposed in 2.
In addition, various rule changes to assure informed consent by investors whose shares are lent to short sellers were suggested by seven companies.
3. Subcommittee hearings
In order to hear testimony on the allegations of short-seller abuse and on the programs of the SEC and the self-regulatory organizations (SROs) for controlling abusive practices, the Commerce, Consumer, and Monetary Affairs Subcommittee held three days of hearings in November and December 1989. On November 28, the subcommittee heard testimony from three company executives whose companies had been the targets of short selling and who reported abusive practices by short sellers. The subcommittee also heard testimony from two industry experts who gave a broader overview of short selling and its abuses, and it received for the record a statement from Joseph Feshbach of Feshbach Brothers, a major short-selling investment partnership, commenting on the issues the subcommittee had raised.
On December 29, the subcommittee heard testimony from John Guion, of the National Association of OTC Companies, and from the New York and American Stock Exchanges and the National Association of Securities Dealers (NASD). Mr. Guion reported on a survey his organization had conducted among 1,000 public companies concerning their experience with short-selling abuses and their views regarding possible regulatory improvements, from which he concluded that there is very widespread support among public companies for fuller disclosure of short-selling activity. He reported the intention of his organization to recommend to the SEC a new public reporting rule applicable to any individual short seller who accumulates a short position equal to 5 percent or more of a companys total shares outstanding.
Edward Kwalwasser, representing the New York Stock Exchange, and Stephen Lister, representing the American Stock Exchange, described the role of the SECs uptick rule in suppressing "bear raids" by short sellers and the manner in which the Exchanges, through various rules, control the spreading of misleading rumors and prohibit naked short selling. They both expressed skepticism regarding the subcommittees concern that shareholders might lose proxy voting rights when broker-dealer firms lend customers shares to short sellers. Mr. Lister also expressed concern that there might be unintended adverse effects from requiring public reporting of large individual short positions.
John Pinto and Gene Finn, testifying for the NASD, described the NASDs recent and proposed rule changes for strengthening their controls over naked short selling and other short-selling abuses. They opposed the extension of the SECs uptick rule to NASDAQ trading, basing their analysis in part of a major study of short-selling regulation that had recently been completed by Irving Pollack, a former SEC Commissioner and senior regulatory official. They also commented briefly on several other regulatory issues related to short selling.
Richard Ketchum, Director of the SECs Division of Market Regulation, and John Sturc, Associate Director of the SECs Division of Enforcement, presented the testimony of the Securities and Exchange Commission on December 6. They described at length the regulatory and enforcement programs of the SEC as they apply to short selling, and their prepared testimony also included detailed responses to a number of questions the subcommittee had submitted in advance. On the question of extending the uptick rule to NASDAQ securities, the SEC position was that they did not believe a need for this rule change had been demonstrated, but the SEC would continue to study the merits of this proposal. Regarding the proposal for public reporting of large individual short positions, they stated that the SEC does not favor public reporting that reveals potentially sensitive trading strategies, and furthermore that the SEC lacks authority to impose such a requirement without legislation.
4. Analysis of American Stock Exchange surveillance report
In 1987 the American Stock Exchange (ASE) investigated company allegations of possible manipulative activity in connection with short selling in the securities of three ASE-listed companies. The Exchange prepared and submitted to the SEC a lengthy surveillance report dated November 6, 1987, in which the Exchange reported finding no evidence of manipulation but recommended further inquiry by the SEC. The SEC provided a copy of this report to the subcommittee immediately prior to the 1989 hearings, with a request that it be treated as a confidential document because of its detailed data on individual security trades by certain individuals.
Following the hearings the subcommittee analyzed the surveillance report in substantial detail in order to evaluate the thoroughness of the American Exchange investigation.5. Study of SEC investigations of short-sale target companies
Following the hearings the subcommittee inquired of the SEC by letter what percentages of formal investigations and informal inquiries opened by the SEC to investigate companies for accounting fraud or other fraudulent public disclosures involved companies where a short interest existed, at the time the Commission began its inquiry, of at least 5 percent of the companys total shares outstanding. The purpose of the subcommittee inquiry was to attempt to verify company complaints that the SEC often assisted short sellers by investigating companies that the short sellers had identified as targets.
The SEC responded that they did not have the necessary information in their possession to respond to this inquiry. The SEC did offer, however, to permit subcommittee staff to view listings of SEC formal and informal investigations opened regarding suspected cases of the sort specified by the subcommittee.
A subcommittee staff person therefore compiled from these SEC listings and from the published monthly short interest reports released by the NASD the necessary data to prepare a partial answer to the question. The compilation prepared by the subcommittee covers SEC investigations of NASDAQ companies opened between March 1988 and March 1989.
6. Analysis of NSCC fails data, December 1990
In order to investigate company allegations of naked short selling, the subcommittee requested from the National Securities Clearing Corporation daily tabulations of clearing shorts (failures to deliver securities by settlement date) and clearing longs (failures to receive securities by settlement date) for every trading day in December 1990. The subcommittee received daily data from NSCC showing clearing shorts that aggregated at least 10,000 shares in a given equity issue and that were due from selling brokers who had been short in that issue for at least 5 trading days. The subcommittee also received data showing daily clearing longs on a comparable basis.
The subcommittee then prepared summary tabulations from the data provided by NSCC. These tabulations show individual stocks in which the clearing short position at NSCC that was due from brokers who had been continuously short for at least 10 days averaged at least 20,000 shares throughout the entire month of December. The subcommittee compared these cases of substantial and persistent clearing shorts with the publicly reported investor short interest statistics for December 1990.
In these tabulations the subcommittee identified 31 New York Stock Exchange issues, 28 American Stock Exchange issues, 129 NASDAQ issues, and 54 issues the subcommittee could not identify as to market but which appeared to be non-NASDAQ over-the-counter issues. Many of the issues shown in these tabulations also were reported as having substantial investor short positions in the monthly statistical reports as of December 15, and several were issues that had been reported in the press as the targets of professional short sellers. Several others were the stocks of companies that have expressed complaints about short-selling abuse.
The subcommittee then, in March 1991, requested evaluations from the SEC, the New York and American Stock Exchanges, and the NASD as to whether the persistent clearing fails shown in the tabulations reflected naked short selling, and if not what other factors accounted for such persistent and substantial clearing fails.
The SEC has not responded to this inquiry. The New York Exchange has tentatively reported apparent rule violations in three cases but has not completed its review of the matter. The American Exchange reported finding instances of failure to deliver shares after both long sales and short sales but determined that most of the cases examined did not represent rule violations or naked short selling. The NASD did not find significant rule violations or naked short selling.
The subcommittee has not completed its investigation of these findings of substantial and persistent clearing fails in issues subject to active short selling but expects to be able to report on this investigation in 1992.
7. Investigation of New York Stock Exchange proxy voting rules
The subcommittee has been concerned from the beginning of its short-selling investigation that legitimate short selling might have unintended and potentially adverse effects on investors proxy voting rights. The SEC and the SROs expressed the judgment in their hearing testimony that the subcommittees concerns were unfounded. The subcommittee determined, nevertheless, to investigate this question more deeply in late 1990, and in conducting this aspect of its investigation the subcommittee has corresponded at length with the New York Stock Exchange during 1990 and 1991.
In this correspondence the NYSE has confirmed the subcommittees basic supposition that short selling may occasionally lead to an inability on the part of brokerage firms to honor the proxy voting instructions of their customers. The subcommittees analysis of this issue appears in Section VI.
II. The Functional Role of Short Selling
The committee finds that short selling has an important and constructive functional rule in the equity market.
As an investment opportunity, short selling enables investors with negative evaluations of particular individual stocks to invest their funds so as to profit if their evaluations prove to be correct. In doing this, short sellers bring into the pricing structure of the market a balancing influence. Their negative evaluations of stocks then play a role, along with the positive evaluations of other investors who hold the same stock long in their portfolios, in determining the market price of this stock. This participation by short sellers thereby tends to enhance the efficiency of the market pricing mechanism.
The committee finds it highly significant that, among the many market participants and issuers who have complained of short-seller abuse, virtually none have held the position that short selling as an investment practice is bad or should be stopped. On the contrary, many emphasized to the subcommittee their conviction that short selling, per se, is entirely legitimate and constructive, if done according to the rules. The committee shares this conviction.
Continued.....
Furthermore, the Securities Industry Association has stated in a comment letter to the previous proposed rule - short sale:
"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. Much
of this information is available through electronic feeds and is updated frequently."
The bottom line is if a short seller can check the borrowing costs to avoid a short squeeze, so can a potential short squeezer check the borrowing costs. The potential short squeezer already has all the information they need. It is time the SEC and Wall St ceased utilizing the short squeeze red herring. Its nonsense and the industry acknowledges it in these comment letters.
Further illustrating the nonsense of the "short squeeze" red herring is the fact that stock specific FTD data has been released via FOIA without short squeezes occurring. It is time for transparency and some intellectual honesty from the SEC and the Securities Industry on this matter. Stop trying to base decisions for non-transparency on non-existent risks. It's absurd, an insult and lends credence to claims that the Industry's lobbying dollars are clouding the SEC's judgment.
CFA letter - http://www.cfa.com.hk/centre/issues/comment/2003/pdf/
FSA17ShortSelling020603.pdf.
SIA letter - http://www.sec.gov/rules/proposed/s72303/sia013004.htm
In addition to these concerns ,many short sellers are borrowing stock in London and selling long in the U.S. due to a misreading of certain Federal Reserve Board letters that allow the borrow but require the sale be marked short..
I submit that Chairman Cox could achieve the appropriate disclosure by asking DTCC and its members to voluntarily release this information to the public without the exceptions noted and including fails, through the SEC on a pilot basis in order to study its usefulness. He should also put the firms on warning regarding their London stock lending operations. There is no downside and both issuers and the public can us it to understand the effect of naked shorts on investments. The use of such information may however be exaggerated because some of the fails may be inadvertent . However large numbers will allow the issuer to explain to his shareholders and will allow those shareholders to pressure the regulators to investigate. Overstock.com has noted the following reasons for disclosure
• There has been much controversy about whether or not naked short selling is truly a problem. Whatever the true extent of the problem, it would be easy for the SEC to clear up the mystery by publishing the size of the FTDs for the companies on the Reg SHO Threshold List.
• Without failures to deliver reported daily for each threshold security – both within the DTCC and outside the DTCC in “ex-clearing” – the level of naked shorting and its risk to the capital markets is unknown.
• “Sunshine” will provide a disinfectant reducing or even eliminating market manipulation in the form of abusive short selling.
• Additionally, when more is known about particular stocks, it will provide investor confidence in the market.
• The current Reg SHO threshold lists simply contain the names of companies and dates, but do not quantify the number of shares that were not delivered.
• To date, it has been difficult (if not impossible) for companies to obtain information on the amount of fails to deliver in a particular stock.
• The SEC requires that issuers disclose their total number of issued shares. Similarly, issuers and shareholders should be able to access information on the volume of failures to deliver.
• Until there is transparency, we will never know the extent of the risk to our capital markets.
Committee Reports
102d Congress
House Rept. 102-414
102 H. Rpt. 414
SHORT-SELLING ACTIVITY IN THE STOCK MARKET: MARKET EFFECTS AND THE NEED FOR REGULATION (PART 1)
DATE: December 6, 1991. Committed to the Committee of the Whole House on the State of the Union and ordered to be printed
SPONSOR: Mr. Conyers, from the Committee on Government Operations, submitted the following
REPORT
(based on a study by the Commerce, Consumer, and Monetary Affairs Subcommittee)
TEXT:
On November 13, 1991, the Committee on Government Operations approved and adopted a report entitled "Short-Selling Activity in the Stock Market: Market Effects and the Need for Regulation (Part 1)." The chairman was directed to transmit a copy to the Speaker of the House.
I. Introduction and Background
Short selling has been practiced in the Nations securities markets for many years. It is not a recent innovation in finance. However, the effects of short selling on the securities markets are not widely understood. Moreover, strong criticism has been directed in recent years at the regulatory system by investors and by companies who believe that inadequate regulation has permitted substantial abuses to develop.
Although the basic practice of short selling is not new, it has taken on a new significance just recently. Modern innovations in the clearing and settlement of securities transactions and the widespread adoption of book entry recordkeeping systems have dramatically reduced the costs and increased the market opportunities for short-selling transactions. A new evaluation of how short selling fits into modern securities markets and whether the complaints being heard are valid is therefore needed.
For these reasons, the Commerce, Consumer, and Monetary Affairs Subcommittee of the House Committee on Government Operations has conducted an extensive investigation of short selling in the equity market. Three days of hearings were held in November and December 1989 , a survey of affected companies was conducted in 1989, comprehensive tabulations of short interest statistics were compiled for the years 1986-90, the securities clearing and settlement system has been closely studied, and numerous other aspects of short selling have been evaluated.
Certain elements of this investigation are still in progress. Consequently, the committee has not reached final conclusions and recommendations with respect to many of the questions that have been raised. The questions that are still under study are identified briefly in Section I.C below.
This report represents, therefore, an interim statement of findings and conclusions. The recommendations presented in this report are firm and final, but they do not address several important issues that are still under investigation.
A. The Mechanics of Short Selling
1. The individual short-sale transaction
In a short-sale transaction, an investor places an order with a securities broker to sell shares of stock he or she does not own . If this order is executed by the broker, the investor will then be "short" this stock, meaning he or she will owe so many shares. This short position will appear as a liability item on the investors account statement with the broker.
The purpose of such a trade is to make a profit if the stock price goes down. At some future time the investor buys back the same number of shares of stock, and if this purchase is at a lower price than the price of the short sale, the investor has made a profit.
The cash received from the short sale is credited to the investors account but cannot initially be withdrawn in cash. In fact, the margin regulations of the Federal Reserve require that additional cash be deposited by the investor, or borrowed from the broker, to assure that the investor will be able to buy back the shares sold short to complete the transaction.
Moreover, the investor may be required under the margin regulations to deposit additional cash (or borrow more from the broker) at a later time if the price of the shares sold short increases after the short sale. If the investor is unable to provide the additional margin, the short position will be closed out by the broker, and the investor is charged for the cost of buying back the shares.
On the other hand, if the price of the stock in which the investor is short should decline, the investors broker is permitted to release a corresponding portion of the cash margin and pay it out to the investor. If the price should decline to zero because the stock has become worthless, then the investor may get all his or her money out in cash without ever purchasing back the stock to close out the short position.
As long as his or her account has sufficient margin, the short investor may remain short indefinitely. There is no time limit on short investments. The only complication, other than insufficient margin, that could force an investor to close out a short position prematurely by buying back the shares would be when
Transparency of Short Sale Reporting
By: jcline
13 Feb 2007, 09:50 AM EST Msg. 337546 of 337559
Transparency of Short Sale Reporting
Peter J. Chepucavage
Presentation for “The Changing Business of Securities Lending”
NY, NY September 18,2006
This analysis is based on a two part comment letter by Thomas Reilly on the proposed amendments to Reg. SHO dated 9/6 and 9/7.I have added certain insights where applicable and attached the disclosure sections of H.R. Rep102-414-, December 6,1991 which recommended daily short sale reporting and stated the following with respect to the SEC’S approach to short selling:
“Accurate and timely information for investors is essential for a fair and efficient securities market. The unchallenged and unpunished circulation of false or misleading reports about company affairs is very destructive of fair markets. It discourages long-term investors from committing their funds to companies that have been made the targets of information distortions, and in this way it impairs and may even destroy these companies access to the equity market for new capital.
The SEC does not take an evenhanded and balanced approach toward information integrity in the equity market. The SEC vigorously investigates suspected cases of misleading or false information released by company officials about their own companies, which is entirely proper regulatory scrutiny, but the SEC does not employ equal vigor on the other side. The SEC has not committed itself to a policy of suppressing false or manipulative rumor circulation by parties seeking to discredit a company or its officers or products, and it has not displayed any such commitment in practice through its enforcement program.
Small companies are especially vulnerable to campaigns of intentional distortion about their company affairs, for two reasons. First, they lack the resources usually available to a larger company to conduct an expensive information campaign to combat false rumors directly. Second, knowledge of their affairs among the financial press and among securities professionals, who may be able to evaluate false charges critically and render a constructive independent judgment, is generally much less widespread than in the case of large companies.
The SEC should adopt a formal policy and administrative program for improving the integrity of information flows about public companies, especially smaller companies. This program should include a commitment of resources to vigorous investigation of suspected cases of dissemination of false information or of unverifiable information under false pretenses (such as impersonation of company officers or regulatory authorities). The SEC should also evaluate the adequacy of the enforcement authority at its disposal for controlling information distortions about public companies, and should advise Congress of its recommendations for additional authority, if needed.
This commitment by the SEC is needed in part to provide greater confidence to investors that they can commit their funds to investments in small company stocks without excessive vulnerability to abusive information distortion by short sellers. A commitment of this nature by the SEC is needed to dissipate the unhealthy psychological atmosphere, referred to above, that adversely affects the markets for many stock issues in which there is substantial short-selling activity. “
As noted by Mr. Reilly, there remains 15 years later, a unique vacuum in the disclosure of short sales at a time when the public is extremely concerned about naked short sales. Recent estimates suggest that short sales account for over 25% of total volume and that the large investment banks get 25-50% of their profits from hedge funds. Yet the current disclosure is misleading when it excludes arbitrage shorts and fails to disclose naked shorts. It is arguably the sole area where the SEC and Congress choose not to force disclosure of material information. Indeed the Commission did not ask for comment on disclosure in the concept release and proposed rule leading up to Reg SHO. It is only the state of Utah that has ventured into disclosure territory. There is little explanation for non-disclosure of the naked shorts occurring for each issuer especially when they are available thru an FOIA request and to industry insiders. Furthermore there is no recent SEC discussion to explain their reluctance to do so. The Commission’s last word was a concept release in 1991 as a result of the the above referenced House Report. Also attached is a dialogue from last year’s NASSA conference that addresses disclosing naked shorts. See attached transcript at pp.41-47. Reilly notes as follows;
FTD/naked shorts data -
The fact that the SEC selectively releases FTD data through the FOIA process clearly indicates there is a problem both the SEC and the Industry want to shield. It is high time some transparency entered the fray letting investors in on the issue at hand. All FTD data should be released per security. Furthermore, while the SEC pats itself on the back for a reduction in FTD's (shares) there is no mention of the monetary value of those FTD's (shares). If the monetary value of fails does not decline with a 30+% reduction in fails on a share basis then you have allowed the industry to game your regulation. Any analysis of FTD data, and SHO's effectiveness, without a monetary component is absurd.
Monthly Short Interest Reporting -
The fact that these figures are issued without explanatory notices is a disservice to the investing public. The figures released by the NYSE and Nasdaq on a monthly basis are NOT, let me repeat, NOT all of the short positions in the market. Not by a longshot. The short interest figures are pure unadulterated half-truths sold as whole-truths and Wall Street has been pulling the wool over everyone’s eyes, including some of the top academics in the country. Let me explain.
Every month the Nasdaq requires its members to report short interest under NASD Rule 3360 - Short interest Reporting:
a) Each member shall maintain a record of total "short" positions in all customer and proprietary firm accounts in securities included in The Nasdaq Stock Market
and in each other security listed on a registered national securities exchange and not otherwise reported to another self-regulatory organization and shall regularly report
such information to NASD in such a manner as may be prescribed by NASD. For the purposes of this rule, the term "customer" includes a broker/dealer. Reports shall be
made as of the close of the settlement date designated by NASD. Reports shall be received by NASD no later than the second business day after the reporting settlement date designated by NASD.
(b) For purposes of this Rule, "short" positions to be reported are those resulting from "short sales" as that term is defined in SEC Rule 200 of Regulation SHO, with
the exception of positions that meet the requirements of Subsections (e)(1), (6), (7), (8), and (10) of SEC Rule 10a-1 adopted under the Act.
In addition, every month the NYSE requires its members to report short interest under NYSE rule 421.10 Periodic reports
Short positions.—Member organizations and individual direct clearing members for which the Exchange is the designated examining authority are required to report "short" positions, including odd lots, in each stock or warrant listed on the Exchange, and in each other stock or warrant not listed on the Exchange which is not otherwise reported to another United States securities exchange or securities
association, using such automated format and methods as prescribed by the Exchange. Such reports must include customer and proprietary positions and must
be made at such times and covering such time period as may be designated by the
Exchange.
Members and member organizations for which the Exchange is not the designated examining authority must report "short" positions to the self-regulatory exchange which is its designated examining authority if such DEA has a requirement for such reports. If the DEA does not have such a reporting requirement, then such member or member organization must comply with the provisions of Rule 421.
The term "designated examining authority" means the self-regulatory organization which has been assigned responsibility for examining a member or member
organization for compliance with applicable financial responsibility rules. (See Rule 17d-1 under the Securities
Exchange Act of 1934.)
"Short" positions to be reported are those resulting from "short" sales as defined in the Securities and Exchange Commission's Regulation 240.3b-3, but excluding
positions resulting from sales specified in clauses (1), (6), (7), (8), (9) and (10) of paragraph (e) of the Commission's Regulation 240.10a-1. Also to be excluded are
"short" positions carried for other members and member organizations reporting for themselves.
Only one report should be made for each stock or warrant in which there is a short position. If more than one "account" has a short position in the same stock or warrant, the combined aggregate should be reported.
The rules above contain a number of reporting exceptions that most investors do not know exist including, but not limited to the enormous arbitrage short positions. When investors check the short interest of a stock they do not see a notice telling them the short interest may not represent all of the short positions in the stock. We are supposed to have a market operating on transparency, where all participants are on equal footing. It seems to me this
is a serious breach of that market principal. In fact when I researched the rules pertaining to short interest reporting I found it downright misleading. The average investor should not have to investigate the rules, as I have presented above, to ascertain that the short interest data is incomplete and contains many exceptions to reporting.
In March, 2005 SEC Chairman William Donaldson testified before the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises on The Long and Short of Hedge Funds: Effects of Strategies for Managing Market Risk. In that testimony Chairman Donaldson had some revealing testimony in which he stated:
"While the Commission's rules generally do not require the disclosure of most short sales or short security positions, rules of self-regulatory organizations require their
members to report once a month aggregate short positions in exchange-listed and Nasdaq securities to all customer (including hedge fund customers) and proprietary
accounts. This information is publicly available."
The SEC should take another look at this statement. "The SEC does not require the disclosure of most short sales". Yes, thats true, as I have pointed out above, there are numerous exceptions provided by the SEC and there is no requirement to include them on Form 13(F). However Chairman Donaldson goes on to state that "the NYSE and Nasdaq require their members to report once a month aggregate short positions in exchange-listed and Nasdaq securities to all customer (including hedge fund customers) and proprietary accounts. This information is publicly available." The problem is Chairman Donaldson failed to mention the publicly
available information excepts the same information that led Chairman Donaldson to make the observation that most short sales are not reported.
Chairman Donaldsons testimony perfectly illustrates how information is available to Wall St and unavailable to the small investor. Chairman Donaldson further stated that the SEC reasoned in 1991 that requiring public reporting of material short security positions in publicly traded companies should not be adopted because:
"SROs require members to report short positions in all customer and proprietary accounts and aggregate information, by security, is published monthly. Issuers, through their industry contacts, probably have little difficulty in identifying very large short sellers."
So, what Chairman Donaldson essentially said is unless you have INDUSTRY CONTACTS (Securities lending desks),you will not be able to find out who is hiding behind the exemptions provided in the SEC, NASD and NYSE rules and in effect know the real short position in a security. That is not transparency, it is information rigged in favor of Wall St, hedge funds and institutions. The folks with "INDUSTRY CONTACTS."
The arbitrage exception to reporting short interest mentioned above is a very peculiar aspect of this dissemination of half truths sold as whole truths. Why? Because it wasn’t always in the rules and because arbitrageurs (risk,convertible etc) are some of the biggest
short sellers in the market. In 1986, the NASD issued Notices to Members 86-4 and 86-15 requiring all NASD members to maintain a record of their total "short" positions in NASDAQ securities in all customer and proprietary firm accounts and to report aggregate "short" positions
to the NASD on a monthly basis beginning in February 1986. The notice specifically required "Short positions created as a result of arbitraged transactions are required to be included in the reported aggregate "short" positions. Apparently that rule requirement has been changed by the SEC since then. The question is why?
The exception for arbitraged positions is so peculiar, in fact, that many heavyweights in the world of academia have been snookered over the past years. Finance professors from the likes of MIT, Harvard, Yale... have done studies and written working papers on short interest thinking the arbitrage shorts were included in the short interest figures. Some even going so far to come up with elaborate calculations and assumptions to nullify the impact on their studies.
The bottom line here is investors of all stripes deserve the full, complete picture when they examine short interest. An investor should not need "industry contacts" to determine the extent of the short interest in a particular security. Short interest is important and can have serious implications on a stocks performance. As Paul Asquith and Lisa Meulbroek of Harvard Business School pointed out in a working paper, there is a strong correlation between short interest and subsequent negative corporate returns:
"Using data on monthly short interest positions for all New York Stock Exchange and American Stock Exchange stocks from 1976-1993, we detect a strong negative relation between short interest and subsequent returns, both during the time the stocks are heavily shorted and over the following two years. This relationship persists over the entire 18 year period, and the abnormal returns are even more negative for firms which are heavily shorted for more than one month."
The following Freedom of Information Act request was filed in 2005 in an attempt to see if the SEC had any idea what the total, complete short interest was in the stock market:
Under the Freedom of Information Act (FOIA), please send me the aggregate common stock short interest in the NYSE and Nasdaq, including positions that meet the requirements of Subsections (e)(1), (6), (7), (8), and (10) of SEC Rule 10a-1. Please provide the most recent available aggregate data for each exchange separately. If the commission does not maintain or monitor the aggregate data,
including exceptions provided above, please state so in your response.
The response from the SEC was straightforward. The SEC does not have the information. The total short interest in the stock market is an unknown. Its unknown because its not required to be reported.
The last study on short selling was done by Congress in 1991 and made numerous findings.H.R.Rep.No.102-414(1991) Two of the findings regarding disclosure were as follows:
a.) a method for collecting daily short-selling activity and weekly short interest data from broker-dealers should be developed and this information should be available electronically to the market in aggregate form
b.) Congress should enact a reporting requirement for large individual short positions.
Neither of those recommendations were enacted and I submit that a third should be added to eliminate the aforementioned exceptions or require an explanatory notice any short interest report that is disseminated to the public. Its time the SEC and Congress revisited the issue. The current disclosure is deficient and misleading. The true short interest in the market is unknown. As for individual security short interest. Nobody knows those answers either.
The "Short Squeeze" red herring
The SEC needs to discontinue their use of a "short squeeze" risk as an excuse for not providing transparency regarding FTD data. Not only is it pure bunk, refuted by the industry itself, it is an insult to the intelligence of all investors.
As I mentioned in part one of my comments the real short interest or borrowing availability of all securities can be identified through, as Chairman Donaldson stated, INDUSTRY CONTACTS. Those "industry contacts" are the securities lending desks and organizations that compile, provide and make available a plethora of short interest and borrowing information to Wall St., hedge funds and institutions. In essence, the folks who have the capacity to execute a short squeeze already have all of the information they need.
As the CFA Institute, formerly the Association for Investment Management, stated in its comment letter to the FSA (UK's version of the SEC) concerning the lack of transparency in short selling and responding to a naked short selling scandal in that country:
"professional investors use stock lending information from securities lenders to determine the level of short selling in a security. They can determine whether a large percentage of a company’s shares are already sold short by checking the borrowing costs. By charging more for stocks with significant short interest, lenders provide these investors with information that enables them to determine the risk of a market squeeze."
AND
"reporting by subject stock achieves transparency without putting institutions that enable or engage in short selling at risk of market squeezes."
''After Grassley, who was equally angry and agitated with the SEC, had heard a bunch of the testimony, he cut the SEC off and proposed legislation that would stop a government agency from hassling whistleblowers like Aguirre - the SEC is subpoenaing all his correspondence with Congress, which both Grassley and Specter went nuts over - and justifiably so, as Aguirre pointed out that he had already supplied an exhaustive amount of data to the SEC.
As he closed the hearing, Specter said, "We are not finished with this."
His last words were that this is "Very, very troubling, at a minimum."
Yes, Senator. You are correct. What you are seeing is a regulator acting like a private company trying to engage in a cover-up of its nepotism and obstruction of justice. Exactly like one. And its ego and power is such that it thinks it can tell Congress to pound sand.''
http://www.thesanitycheck.com/BobsSanityCheckBlog/tabid/56/EntryID/540/Default.aspx
IMVHO This is exactly what is needed. fwiw
emit...
..."My biggest beef with the SEC is that I think that they should give ME NOTICE before suspending stock. That way I can preserve my capital and invest elsewhere. Once I have safely removed my position, then and only then should the SEC be able to suspend trading."
JeffGator....you hit the nail on the head with my feelings of what just happened with CKYS. The SEC, IMO, is NOT protecting me, as they claim, whatsoever! The SEC should notify current investors about the possible action being taken so that we can take our hard-earned money elsewhere. Let the company CEO's and infrastructure deal with the hardship, not us.
Fantastic new board!
Fantastic information on how sleazy the market makers and hedge funds really are!
People that have been in the market the last few years have been saying this all along.
Now average shareholders that have been wondering why their stocks keep on going down know why.
Well the truth is out!
Now someone has to make the hedge funds and market makers buy back all the phantom stock the have been naked shorting!
And maybe this mess can be fixed.
Class Action against Hedge Funds
Seeger Weiss LLP Announces a Class Action Lawsuit On Behalf of Fairfax Financial Holdings Limited Shareholders Against Various Hedge Funds -- FFH
Wednesday February 7, 5:18 pm ET
NEW YORK, Feb. 7, 2007 (PRIME NEWSWIRE) -- The law firm Seeger Weiss LLP announces that it filed a class action lawsuit today in the United States District Court for the District of New Jersey on behalf of all sellers of common stock of Fairfax Financial Holdings Limited (NYSE:FFH - News) over the New York Stock Exchange (``NYSE'') between December 18, 2002 and July 25, 2006 (the ``Class Period''), seeking to pursue remedies under the Securities Exchange Act of 1934 (the ``Exchange Act'').
The Complaint filed states that the case ``arises from a massive, illegal stock market manipulation scheme that has targeted and severely harmed ... shareholders of Fairfax, and has resulted in immense ill-gotten profits for defendants S.A.C. Capital, Exis Capital, Third Point, Rocker Partners and other extremely powerful hedge funds.'' The Complaint further alleges that Defendants ``launched a manipulation scheme ... which was an abusive short selling strategy coupled with a public relations campaign chock full of false and misleading statements about Fairfax, its executives, its business, and its common stock price designed to drive down (Fairfax's) stock price.''
Seeger Weiss LLP is a New York-based firm that is active in major complex litigations and class actions pending in federal and state courts throughout the United States. Seeger Weiss has taken a leading role in many important actions on behalf of defrauded investors, consumers and others and has recovered millions of dollars for clients and class members.
If you are a member of the class described above, you may, not later than 60 days from today move the Court to serve as lead plaintiff of the class, if you so choose. A lead plaintiff is a representative party that acts on behalf of other class members in directing the litigation. In order to be appointed lead plaintiff, the Court must determine that the class member's claim is typical of the claims of other class members, and that the class member will adequately represent the class. Under certain circumstances, one or more class members may together serve as ``lead plaintiff.'' Your ability to share in any recovery is not, however, affected by the decision whether or not to serve as a lead plaintiff. You may retain Seeger Weiss LLP, or other counsel of your choice, to serve as your counsel in this action.
If you wish to discuss this action with us, or have any questions concerning this notice or your rights and interests with regard to the case, please contact us:
More information on this and other class actions can be found on the Class Action Newsline at http://www.primenewswire.com/ca
Contact:
Seeger Weiss LLP
(877) 541-3273
------------------------
http://biz.yahoo.com/pz/070207/113344.html
''Senator Charles Grassley (R-IA) said that “The S.E.C. should have taken Mr. Aguirre’s allegations seriously. Instead, it circled the wagons and shot the whistle-blower — an all-too-familiar practice in Washington.” He also said that the SEC’s investigation into the case “was plagued with problems from its beginning to its abrupt conclusion. The termination of Mr. Aguirre by the S.E.C. was highly suspect given the timing and circumstances.”
http://www.faulkingtruth.com/Articles/Investing101/1071.html
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TESTIMONY OF GARY J. AGUIRRE, ESQ.
BEFORE THE
U.S. SENATE COMMITTEE ON THE JUDICIARY
June 28, 2006
United States Senate
Committee on the Judiciary
224 Dirksen Senate Office Building
Washington, D.C. 20510
Mr. Chairman, Senator Leahy, Committee Members:
The subject of your Committee’s hearing today (Hedge Funds and Independent Analysts: How Independent Are Their Relationships?) is the most recent variant of a stubborn question that keeps popping at Senate committee hearings: is federal law enforcement adequately protecting the nation’s capital markets and their participants from the risk of manipulation and fraud by the nation’s 11,500 hedge funds? The answer is no.
And the answer is no whatever facts you consider. It is no when the Securities and Exchange Commission ("SEC") fails to recognize any hedge fund fraud or manipulation against other market participants for a quarter century: from 1979 until 2004. It is no when the SEC fails to protect mutual fund investors when billions of dollars are siphoned from their accounts by hedge funds. It is no when you compare what the SEC is doing and saying about hedge funds with what its counterparts in Europe are doing and saying. It is no when the Department of Justice ("DOJ") merely shadows the SEC’s meager scrutiny of hedge funds. It is a deafening no when senior SEC officials throw a roadblock in the insider trading investigation of one of the nation’s largest hedge funds because the suspected tipper has powerful political connections, as they did with the investigation assigned to me.
Overview
From September 2004 through September 2005, I had primary responsibility for conducting an investigation by the Securities and Exchange Commission ("SEC") of suspected insider trading and market manipulation by one of the nation’s largest hedge funds, Pequot Capital Management ("PCM"). I worked long hours on the investigation with other equally committed staff. Among them was a thirty-year SEC veteran, then SEC’s most experienced and respected investigator of insider trading. His duties included teaching incoming Enforcement attorneys and foreign regulators how to conduct an insider trading investigation. At his retirement party, he told Enforcement Director, Linda Thomsen, in my presence that the PCM investigation was the most important one he had worked on in his thirty-year career with the SEC. Another seventeen-year veteran, who worked side by side with me, told me the same. His expertise was market manipulation and insider trading.
I believe the nation’s capital markets face a growing risk from unregulated pools of money--now called hedge funds--just as they did in the 1920s from unregulated pools of money--then called syndicates, trusts or pools. Those unregulated pools were instrumental in delivering the 1929 Crash. They were, among other things, skilled at using various devices to manipulate stock prices to trick the public. There is growing evidence that today’s unregulated pools--hedge funds--have advanced and refined the practice of manipulating and cheating other market participants.
One final introductory point: you may be curious why someone comes to the SEC after twenty-eight years as a trial attorney in private practice. I left the full-time practice of law in 1995. I had achieved my professional and economic goals and had no intention of returning to the full-time practice. Five years later, I looked back on that career that had missing chapter. Very little of it had been devoted to public service. I decided it was not too late to write that chapter and returned to law school to retool for that purpose. While at Georgetown, I decided my skills might be useful at the SEC.
The "Good Old Times" Are Back Again
Fixing the SEC so it can protect investors and capital markets from hedge fund abuse will not be an easy task. Powerful interests want the SEC to stay just the way it is or, better yet, to become even weaker. Those interests are not just the hedge funds. They include the financial industries that are receiving tens of billions of dollars in revenues for helping hedge funds cheat other market participants or close their eyes to the carnage. At the top of that list are the big investment banks, e.g., Goldman Sachs, Morgan Stanley, Merrill Lynch and Bear Stearns. Those interests know how to reward friends and punish perceived enemies. Their tentacles reach far. They stopped the hedge fund investigation I was assigned to conduct. They cost me my job.
Wall Street’s misuse of influence is nothing new. Ferdinand Pecora sensed this misuse of influence when he conducted the investigation in 1933 and 1934 on behalf of the Senate Banking Committee that led to the adoption of the securities acts and the creation of the SEC. His detailed cross-examination of powerful bankers, brokers, and industrialists revealed the ills the securities acts were designed to cure.
Five years later, he warned in Wall Street under Oath:
Under the surface of the governmental regulation of the securities market, the same forces that produced the riotous speculative excesses of the "wild bull market" of 1929 still give evidences of their existence and influence. Though repressed for the present, it cannot be doubted that, given a suitable opportunity, they would spring back into pernicious activity (emphasis added).
Frequently we are told that this regulation has been throttling the country's prosperity. Bitterly hostile was Wall Street to the enactment of the regulatory legislation. It now looks forward to the day when it shall, as it hopes, reassume the reigns of its former power. . . .
The public, however, is sometimes forgetful. As its memory of the unhappy market collapse of 1929 becomes blurred, it may lend at least one ear to the persuasive voices of The Street subtly pleading for a return to the "good old times."
I suggest the "good old times" are now back again and the device Congress designed to protect the public investor--the SEC--needs fixing.
The first step in getting a handle on the risks posed by hedge funds is to separate and tag them. I believe there are three risks: (1) hedge fund conduct that cheats their own investors; (2) hedge fund conduct that randomly cheats everybody else, and (3) the systemic risks such as those that surfaced when Long Term Capital Management ("LTCM") collapsed. I will not address the LTCM class of risks because it is beyond my expertise and its solution appears to involve multiple federal agencies.
Hedge Fund Fraud Has Two Distinct Classes of Victims
There are two different species of hedge fund fraud. They are easily distinguished because each has a different victim. One species victimizes the hedge fund’s own investors--wealthy individuals and institutions. The other species randomly victimizes everybody else.
Hedge Fund Fraud against Hedge Fund Investors
This species of fraud poses little risk of a severe crisis to the capital markets for multiple reasons. First, the incidence of fraud by hedge funds against their own investors is not disproportionately high. Further, when hedge funds do cheat their own investors, the character of fraud is not unique. Put differently, a Ponzi scheme is a Ponzi scheme whether the investment vehicle is a corporation, an investment trust, or a hedge fund. That means the SEC has the experience to tackle this species of fraud. They have been doing it for decades. Indeed, through September 2003, all 38 enforcement actions the SEC brought against hedge funds over the prior four years were exclusively for this class of fraud--hedge funds victimizing their own investors.
Further, hedge fund investors, as a class, are not the easiest targets. They are wealthy individuals and institutions. They are more likely to become suspicious when the quarterly reports are a bit off. If they don’t get the right answers, they are prone to call their attorneys, who file lawsuits and call the SEC. Once again, the SEC knows how to investigate this kind of fraud.
Of course, wealthy individuals and institutions have entrusted $1.2 trillion to hedge funds. That is a big chunk of money, but it is only a tiny fraction of the total assets that individuals and institutions have invested in the capital markets. For example, mutual funds collectively manage $9.2 trillion. The bond and equity markets are more than $40 trillion. Globally, $90 trillion of financial assets are under management. Thus, by any measure, hedge funds have significant assets, but by no means dominate the capital markets. No amount of fraud by hedge funds against their own investors could cripple the capital markets. It is too little money.
From these facts, the hedge fund industry and others contend that hedge funds need no special attention. Why shackle an industry that does so much good for our capital markets, e.g., liquidity or risk transfer? Though the comments are valid when applied to the first species of hedge fund fraud, they are off the mark when applied to the second species discussed next.
Hedge Fund Fraud against Other Market Participants
This species of fraud has an easier target and a far greater potential to disrupt the capital markets. Its victims have no connection with the hedge fund. They are random victims. Much like the victims of a sniper, they never knew what hit them. For example, the millions of mutual fund investors had no clue that billions of dollars were being siphoned from their investment accounts each year by hundreds of hedge funds, as it happened in the recent mutual fund scandal. Likewise, the value investor has no clue that an attractively priced small cap is on its way to bankruptcy via the naked shorting of an $8 billion hedge fund. Similarly, the most sophisticated institutional investor will not second guess the expensive computer model when it begins blinking sell on XYZ stock because it has become overpriced. How could that investor know several hedge funds are buying up XYZ stock because they have been tipped by an investment bank executive that Google will make a tender offer for XYZ at a 50% premium to its current stock price?
The use of invisible fraud and manipulation is nothing new. It was just as invisible in the 1920s when banks and brokers employed the same devices to cheat the public. Pecora described why the public could not detect this type of fraud in the 1920s in words that ring true today:
The Public was always in the dark. It could not tell whether sales were due merely to
the "free play of supply and demand," or whether they were the product of manipulated
activities…It all looks alike on the ticker. Nor did the public have access to the inside
information on which the officers, the directors and the dominant shareholders act
(emphasis added).
In the Darwinian hedge fund world, cheating other market participants has its benefits. It increases the profits to the hedge fund’s wealthy individual and institutional investors. Those happy folk tell their friends. New money increases assets under management. The hedge fund takes 2% of those new assets plus 20% of any profits those assets generate. If a manager can maintain that track record, he may join a very exclusive club. The top twenty-five hedge fund managers individually made between $130 million and $1.5 billion last year. The key to getting an investor to plunk down $500,000 to $50 million subject to the 2% and 20% hedge fund take: "As long as the performance is up there, in the end the investors do not care about the high fees."
It also works the other way. A hedge fund manager may find his investors heading for the door. The profits at rival funds are a couple points higher. Rumors circulate that the competition found a way to siphon funds from mutual fund accounts. To survive, a hedge fund must learn to siphon. One after another, hedge funds learn the trick. Fortune Magazine offers this colorful and insightful account how market timing and late trading spread like a virus from one hedge fund to another until it infected more than 400:
Eddie Stern’s saga is the untold tale of the market-timing scandal: where the practices
were conceived, how they took hold, and how they metastasized from a benign
cat-and-mouse game to a sophisticated gambit in which hedge funds slung around
billions, compromising an entire industry. "It was like a little brotherhood of people who
embraced this niche in life," says Brown, "a whole grotesque industry growing up
based on screwing small investors. It's about as bad as it gets."
This species of fraud--victimizing other market participants--also operates under the SEC’s radar. In fact, it went undetected by the SEC until September 2003, and, even then, it was not the SEC that discovered it. Rather, a state attorney general announced the first case and settlement involving a hedge fund that had used the market timing and later trading devices- to siphon funds from the accounts of unsuspecting mutual fund investors. After two critical Government Accountability Office ("GAO") reports and an equally critical Congress, the SEC went after hedge funds and their helpers with a vengeance. Beyond this, as discussed below, the SEC--"the cop on the street"--does not spend much time walking this beat.
Hedge funds’ Dominance of the Capital Markets Creates the Power to Abuse Them
The potential harm that hedge funds can inflict on other market participants has no real limits. Hedge fund trading now dominates the nation’s capital markets. The $1.2 trillion under hedge fund management are on steroids. They recycle at high velocity through the markets. With that $1.2 trillion, hedge funds execute up to fifty percent of the daily trading on the $21 trillion New York Stock Exchange. They also do seventy percent of the trading in the US distressed debt market, US exchange-traded fund market and the convertible bond market. The same picture is emerging in the derivative markets. Patrick Parkinson of the Federal Reserve recently testified at a Senate hearing:
"The active trading by hedge funds has contributed significantly to the extraordinary growth in past years in the market for derivatives (emphasis added)." So far, hedge funds have dominated these markets with only $1.2 trillion under management. But that is changing too. The SEC projects the hedge fund asset base will increase from $1.2 trillion to $6 trillion by 2015.
Hedge fund trading generates huge commissions and fees to investment banks and brokers. That revenue flow gives hedge funds influence with both brokers and investment banks. The Economist examined this growing influence in an article last year:
At a time when mutual and pension funds have become ever more reluctant to pay the traditional five cents a share for trades, hedge funds pay up to four times that amount if in the process they can receive good ideas or particularly effective execution….
And trading is just the beginning for banks. Hedge funds want hot issues, structured derivatives, margin, stock-lending for short sales and the equivalent for fixed-income, clearing and settlement, customer support and marketing. The money coming from all these transactions and fees is enormous….Although there is some overlap in the numbers, investment banks collected $15 billion either directly from hedge funds or because of them, producing $6 billion in profits. For individual firms, hedge funds were critical to last year's performance. They produced one-quarter of Goldman Sachs's profits, estimates Guy Moszkowski of Merrill Lynch, and only a slightly smaller slug of Morgan Stanley's returns.
The revenue from hedge funds to investment banks was $25 billion for 2004. Since hedge fund assets under management continue to grow exponentially, hedge fund revenue to investment banks will do the same. Consequently, hedge fund influence with those banks will continue to grow as well.
The United Kingdom’s Financial Services Authority ("FSA") expressed concern in June 2005 that hedge funds were getting more from investment banks than their contracts specified. According to the FSA, "insider trading is now institutionalized" because of the flow of tips from investment banks to hedge funds. The FSA "had uncovered signs of insider dealing at almost a third of British M&A deals, with possible culprits including traders at hedge funds and investment banks." That same month, the FSA also observed that hedge funds were "testing the boundaries of acceptable practice with respect to insider trading and market manipulation."
The illegal flow of insider information from investment banks to hedge funds was the primary focus of the hedge fund investigation I headed. Senior SEC officials halted the investigation, as I was told, because the suspected tipper had powerful political connections. Indeed, he does at the highest level. When I raised the propriety of that decision with the most senior Enforcement officials, they fired me. When I apprised Chairman Cox of these events, he did not lift a finger.
How Influence Peddlers Stopped a Critical Hedge Fund Investigation in Its Tracks
The investigation was two-pronged. The insider trading prong involved the securities of twenty public companies. On eighteen occasions, a Self Regulated Organization ("SRO") had referred the suspected insider trading matter to the SEC after conducting its own investigation. In each case, the hedge fund traded shortly before a public announcement sharply increased the value of its new holding. In all but two cases, the hedge fund made at least $1 million. Some referrals involved much larger profits. In two cases, evidence suggested the tip may have come from court personnel. In five cases, the hedge fund made highly profitable trades shortly before public announcements of acquisitions. In two of these cases, evidence indicated the tip had come from an investment bank.
The second prong of the investigation--market manipulation--involved two classes of suspected violations: wash sales and naked shorts. Some of my colleagues believed this prong held a greater potential to severely injure the capital markets. Evidence indicated that hedge funds used wash sales to spike stock prices just as unregulated pools used wash sales to spike stock prices in the 1920s. The investigation of both wash sales and naked shorts led to the hedge fund’s prime broker, a large investment bank.
By May 2005, one of the insider trading matters dwarfed all others: the hedge fund’s trading in two companies just before the announcement of a cash tender offer by one for the other at a 50% premium over the last trading price. The hedge fund profited by $18 million in 30 days. The evidence suggested that the hedge fund’s CEO acted on an unlawful tip in directing the hedge fund’s trades. But the question remained: who tipped him? In May 2005, Branch Chief Robert Hanson, directed me to spend all my time on the one matter and focus on finding the tipper. Accordingly, beginning in May 2005, I searched through millions of emails and other records for clues indicating who tipped the hedge fund CEO and, in June 2005, questioned the hedge fund’s CEO--the suspected tippee--on this issue.
By mid-June, growing evidence pointed to one person: the former CEO of a large investment bank. The suspected tipper likely knew about the tender offer, spoke with the hedge fund’s CEO just before he began to trade, profited by the trades, and had other personal and financial motives for tipping the hedge fund’s CEO. The two suspects trusted each other, did financial favors for each other, and exchanged stock tips. The evidence yielded no other viable candidates.
My supervisors enthusiastically endorsed this factual theory of the evidence. On June 14, I briefed Branch Chief Hanson and Assistant Director Kreitman for one hour on the insider trading investigation, including the evidence that pointed to the suspect as the likely tipper. After which, they authorized me to present this same factual theory and evidence to the FBI and the US Attorney’s office in New York, as the first step toward a possible criminal proceeding against both suspects. Accordingly, at a meeting the next day, I presented the information to an Assistant US Attorney and two FBI agents.
A few days after the meeting, I informed Branch Chief Hanson that I intended to issue subpoenas for the suspected tipper’s examination and key documents. He first reacted positively to the suggestion. But a few days later, to my surprise, Hanson abruptly reversed course. Hanson blocked the issuance of subpoenas for the suspected tipper’s testimony and records, stating that it would be difficult to obtain the authority to issue the subpoenas because the suspected tipper had powerful political connections.
Immediately after Hanson’s comment, external interference with the investigation became evident. A high-powered attorney, Mary Jo White, bypassed the normal protocol of discussing the investigation with the assigned staff attorney. Instead, she went directly to Enforcement Director Linda Thomsen, despite the fact Director Thomsen had no prior involvement in the case. For the first time, senior staff left me out of meetings when they discussed the case. Associate Director Paul Berger--who had very limited knowledge of the facts--emphatically stated in my presence that no case would be filed against the suspected tipper, but gave no reason or clue for his decision. Emails between the suspected tipper and tippee that I had subpoenaed from investment banks were delivered by Mary Jo White to Director Thomsen. That had never happened before in the other 100 subpoenas I had issued. My supervisors, who had strongly supported the case only two weeks before, became angry and defensive when I tried to discuss the issuance of the subpoenas.
Most confounding, I could not understand how senior SEC officials would authorize me to meet with the FBI and the US Attorney to initiate a criminal investigation and then, two weeks later, block the issuance of civil subpoenas for the suspected tipper’s testimony and key documents. The only significant occurrence between those two events was the decision of the US Attorney and the FBI to begin looking into the matter.
From late June until September 2, 2005, I informed every link in the chain of command from my branch chief to the SEC Chairman in over thirty written communications of the special and favored treatment my supervisors were giving to the suspected tipper. By way of example, I enclose a redacted copy of the letter I faxed to Chairman Cox on September 2, 2005. It never got a response. Neither Chairman Cox, nor Director Thomsen, nor Associate Director Berger ever questioned why
the investigation was stopped.
If you wish to know more details how the SEC stopped the investigations, including supporting evidence, the identity of the suspected tipper and tippee, and the tipper’s political connections, you may find this information in the 42-page sworn statement and 46 supporting exhibits I provided Kathy Casey, Esq., Staff Director and Counsel for the Senate Banking Committee, in mid-March 2006.
My Termination
On August 4, 2005, I sent the following email to Director Thomsen:
Do you have an open door policy?
If so, do you recall Hilton Foster’s comment to you about the most important case he
handled in his 30 years with the Commission? [As discussed earlier, Mr. Foster
routinely taught incoming enforcement staff and foreign regulators how to conduct an
insider trading investigation. He worked with me on the investigation from October 2004
until he retired on June 30, 2005.] He wanted me to talk to you about it. It was nearly
killed 5 months ago and is now moving in circles.
It could change the financial markets--make them a little more hospital [hospitable]
for investors, small or big, who do their home work rather than buy information with
favors
The following day, my branch chief told me that senior staff would reconsider my recommendation to take the suspected tipper’s testimony after he and I returned from vacation in September. I went on vacation two weeks later. On September 1, while on vacation, senior staff fired me.
My SEC performance evaluations
Until I questioned the suspected tipper’s special treatment, my supervisors found my work met or exceeded all applicable SEC standards. They certified my performance met all applicable Enforcement standards for a staff attorney in June 2005. In mid-June 2005, Assistant Director Kreitman gave me his highest unofficial award for excellent work on the investigation. Later June, Branch Chief Hanson prepared his assessment of my 2004-2005 performance for a possible merit step increase. Just before the controversy over investigating the suspected tipper arose, Hanson praised my work on the hedge fund investigation, stating:
Gary has an unmatched dedication to this case (often working well beyond normal
work hours) and his efforts have uncovered evidence of potential insider trading and
possible manipulative trading by the fund and its principals. He has been able to
overcome a number of obstacles opposing counsel put in his path on the investigation.
Gary worked closely with the Office of Compliance Inspections and Examinations to
develop the case and worked with several self-regulatory organizations to develop a
number of potential leads. He has gone the extra mile, and then some.
Consequently, on August 21, 2005, the SEC approved my two-step merit increase based on my handling of the hedge fund investigation. The SEC terminated my employment eleven days later on one day’s notice. According to the SEC union president, the SEC’s decision in my case to award a merit pay increase and then terminate my employment is unprecedented.
SEC’s Dismal Record Protecting Market Participants from Hedge Fund Fraud
How the SEC Learned Hedge Funds Cheat Others; the Mutual Fund Scandal
For twenty-five years, from 1979 to 2004, hedge fund fraud and manipulation operated under the SEC’s radar. The SEC brought no cases against hedge funds for manipulation, insider trading, or fraud directed against other market participants. During this period, the SEC recognized only one species of hedge fund fraud: that committed by a hedge fund against its own investors. The SEC first publicly recognized that there were two classes of hedge fund fraud in July 2004. Its proposed rule requiring hedge funds to register noted: "Since the staff report [of September 2003], a new species of hedge fund fraud has been uncovered (emphasis added)."
So, how did senior SEC officials figure out after twenty-five years that hedge funds were also cheating other market participants? Well, as a matter of fact, they did not. A state attorney general announced the settlement of the first case involving a pattern of hedge fund fraud on other market participants. It was the first hedge fund caught for pilfering mutual fund accounts, the investment vehicle of choice for tens of millions--the classic small investor. As for the SEC - "the cop on the street" - it caught nothing.
The total cost to mutual fund investors was staggering. According to Time Magazine, "Academics estimate that late trading costs investors $400 million a year and market timing $4 billion to $5 billion." According to The Wall Street Journal, "[H]edge funds …reaped the lion’s share of gains from the [unlawful] trading." In March 2005, the SEC was investigating 400 hedge funds for their participation in the scam.
The SEC Also Failed to Catch the Helpers--Yet Another Industry it Regulated.
Hedge funds could not have skimmed mutual fund accounts without help. That is just what they got from the brokers the SEC also regulates. "Thirty percent of the brokerage firms the SEC surveyed helped clients mask market-timing trades, either by breaking up big orders or creating special accounts to hide identities." On top of that, "70 percent of the brokers said they were aware that some of their customers were timing the market." They just looked the other way. The SEC survey showed that twenty-five percent of brokerage companies allowed late trading. Late trading occurs where a hedge fund puts in a trade after the funds’ 4 p.m. cutoff, but gets the pre-4 p.m. price. Some have likened it to betting on a horse race after it has been run. Some of those brokers who helped hedge funds pilfer mutual fund accounts were the brokerage arms of large investment banks like Bear, Stearns, & Company, Merrill Lynch & Company, and CIBC.
To sum up, the SEC was oblivious that hedge funds cheated other market participants for twenty-five years. The SEC somehow overlooked a hedge fund scam that cost mutual fund investors billions of dollars per year. The scam was executed for years with the participation of two industries the SEC also regulates: mutual funds and brokers. It would not listen to a whistleblower who was armed with the facts. Eventually, like the public, the SEC learned about the scandal when a state attorney general announced a $30 million settlement. How has the SEC done since then to detect hedge fund fraud that victimizes other market participants?
The PIPE Cases
Over the past year, the SEC has brought three cases for a new type of hedge fund fraud that victimizes other market participants. All three involved a very specific form of insider trading. The facts follow the same pattern. A public company decides to raise money by making a private placement of its stock with the intent to register the stock a few months later. This is commonly known as a private investment in public equity or PIPE. A hedge fund agrees to purchase stock through the placement. The hedge fund also knows that the public announcement of the PIPE will depress the market price of the stock. Knowing that, the hedge fund shorts the company’s stock and covers it with the private placement for a quick and sure profit. In executing the short, the hedge fund acted on material nonpublic information and violated the securities laws.
Once again, the PIPE cases demonstrate the same old SEC enforcement patterns. The cop on the street--the SEC--did not detect this pattern of insider trading. Rather, it was detected by a $100 billion mutual fund and the evidence was then handed over to SEC officials.
In handling the PIPE cases, the SEC again wore blinders. The SEC has twenty-seven PIPE cases; it has filed three; it is investigating twenty-four others. Again, the PIPE cases demonstrate a pattern of insider trading by hedge funds. This pattern raises the obvious question: If hedge funds are willing to trade on nonpublic material information in one situation, might they not be doing the same in others? For example, are they getting tips from investment banks of pending acquisitions before they are publicly announced? Do hedge funds have techniques for obtaining tips, e.g., next quarter’s earnings from public companies before they are publicly announced?
The SEC should be able to check for this. It receives a constant flow of suspected insider trading referrals from SROs. The NASD, NYSE, and AMEX all have market surveillance units that track the market daily for suspicious trades, including insider trading. When their computers detect suspicious trading, the SRO’s staff does its own review and, if the trading appears suspicious, refers the matter to the SEC. Many of those referrals involve hedge funds suspected of insider trading.
But that system breaks down when it comes to referrals involving insider trading by hedge fund. Those referrals are rarely, if ever, investigated, unless they happen to meet the PIPEs cookie cutter mold. The investigation I conducted was an anomaly. The right person at intake found the right senior SEC official. That matter was assigned to me. I then found thirteen other insider trading referrals on the same hedge fund that had been gathering dust. None had been investigated other than a cursory review. No one had looked at the referrals collectively for any patterns.
The institutionalized form of insider trading by hedge funds insidiously erodes the integrity of the stock markets. The concept is best illustrated with an analogy. Imagine a sports arena with thousand small boxes organized in rows on the arena floor. Each box contains an egg: some are Faberge, others gold, others silver and on and on gradually to the rotten eggs. Egg buyers - some sophisticated; some not - carefully inspect the exterior of the boxes for clues to their contents. None may peak inside. The inspection ends at 5 p.m. All egg buyers exit the arena, notes in hand, ready for tomorrow’s auction. In the early hours, a security guard allows a team of egg buyers to enter the arena, open the boxes and survey their contents. The public auction of the boxes begins at 10 a.m. sharp. With their survey notes, the early morning team pays richly for the boxes containing the Faberge, gold and silver eggs and craftily avoids those with lesser value. The sophisticated egg buyers are puzzled why their boxes never contain the prized eggs.
My point is this: those that use insider trading cheat all investors--the most sophisticated institutional investor and the small investor alike. They cherry pick the market and, in so doing, undermine the integrity of the capital markets. They rig the game. One senior executive of a $97 billion mutual fund put it this way: "For the last five years, the hedge funds have gotten a free pass,...it’s damn well time that they're held accountable to the capital market rules, which were created to protect companies and investors to know that the game isn’t rigged." For the sophisticated investor, there are two options: continue to be victimized or join the early morning team.
The Most Recent Statement of the SEC on Policing Hedge Fund Abuse
The most recent testimony from the SEC on its efforts to police hedge fund abuse was given on May 16, 2006, before the Senate Subcommittee on Securities and Investment. Given the growing concern on this subject, this was a golden opportunity for a senior SEC official, perhaps from its Enforcement Division, to tell what new steps the SEC has implemented to protect market participants from hedge fund abuse. Instead, the SEC sent its Director of Investor Education, Susan Wyderko, as if to say that hedge fund abuse is merely a matter of educating investors. She was of course unable to give meaningful testimony or respond to the obvious questions.
Ms. Wyderko’s written testimony offered a ray of hope. It cited three "recent significant cases" to demonstrate the SEC "has taken appropriate remedial legal action" against hedge funds for "market abuse." Unfortunately, those cases merely confirm the analysis above that the SEC has no new thought for dealing with hedge funds. The first cited case is a classic market timing-late trading case. The second was a classic PIPE case.
That leaves the SEC’s handling of the third case, which would be funny, if the SEC were not offering it as an example how it is protecting market participants from hedge fund abuse. In that case, the media began detailing the transparent scheme of Scott Sacane and his hedge fund to manipulate two small biotech stocks in July 2003. The media continued to do so for more than two years until the SEC finally filed its enforcement action in October 2005. The SEC complaint borrowed allegations made by The Wall Street Journal two years earlier, but left out the humor. On July 30, 2003, the Wall Street Journal published this account of Mr. Sacane’s trading:
Thursday, Mr. Sacane disclosed that his health-care fund… "inadvertently" had bought
a majority stake in a small medical-products company called Aksys. Monday, Durus
filed that it owned 77% of Aksys, whose stock has been plummeting for days on the
news. Mr. Sacane insisted that the investment is passive.
But Mr. Sacane, who declined to comment, didn't stop his "inadvertent" buying there.
He also "inadvertently" bought a 33% stake of Esperion Therapeutics.
So what exactly did the SEC uncover over the next two years? Its complaint alleges: "The statement [Sacane’s purchase was inadvertent] was false because the Sacane Defendants knew about their Aksys stock purchases all along, and those purchases were not inadvertent." How could it take the SEC two years to deduce the same point any reader of The Wall Street Journal article immediately understood? If this case were a movie, it would be titled The Keystone Kops meet the Gang that Couldn’t Shoot Straight.
Conclusion
No new legislation or regulation can protect market participants from hedge fund abuse unless the SEC does its job. By any measure, it has not. The SEC failed to detect that hundreds of hedge funds were siphoning billions of dollars from mutual fund investors. It also failed to detect a second pattern of hedge fund abuse--the PIPE insider trading. Its conduct and words give no reason to believe it will detect other hedge fund abuses of market participants.
And then there is the obvious. One SEC investigation picked up the trail of several patterns of hedge fund market abuse. One prong included suspected insider trading in twenty public companies. The other found evidence of numerous wash sales and naked shorts. Both prongs led to the hedge fund’s connection with its prime broker. If the prime broker was involved in any of the violations, as appeared to be the case, the investigation would have had implications for the whole hedge fund industry. In sum, it was the only SEC investigation to put a high beam on the shadowy juncture where hedge funds and investment banks do their lucrative business.
Just after the SEC authorized the investigation to be presented to federal prosecutors and the FBI for possible criminal prosecution, senior SEC Enforcement officials blocked the issuance of civil subpoenas for the suspected tipper’s testimony and key documents. No insider trading case can be filed without proof of the source of the tip. Thus, stopping the investigation of the likely tipper stops the investigation. In so doing, the SEC has given hedge funds and investment banks notice that it will not police their joint activities. The SEC could do no greater disservice to other market participants and especially the small investor. This is not mere incompetence.
It is not surprising that the U.S. Office of Management and Budget (OMB) gave SEC Enforcement its lowest performance assessment: "Results Not Demonstrated." According to the OMB, "that rating indicates that [Enforcement] has not been able to develop acceptable performance goals or collect data to determine whether it is performing." In short, whether or not Enforcement performs is an unknown. And it is an unknown because it has no goals or data. That criticism is aimed at the top. No matter how committed and competent the SEC staff works the trenches, and that was my experience, they cannot achieve the SEC’s mission without leadership equally committed to that mission.
Is there more hedge fund abuse on the horizon? Logic says yes. In the mutual fund scandal, hedge funds broke legal and moral boundaries to make billions in profits at the expense of small investors. In doing so, hedge funds compromised two financial industries--mutual funds and brokers. It seems implausible that hedge funds would suddenly recognize those boundaries if other opportunities arose to make a fast dollar without getting caught. The PIPE cases are just one more example that hedge funds break the law in packs.
http://www.solami.com/hedgetestimony.htm
Senators Say SEC Likely Involved in Cover-Up, Obstructing Justice
Followers of this blog will experience absolutely no surprise when they read the following article, in which Senators Grassley and Specter basically say that the SEC appears to be a den of lying, thieving pit vipers more interested in running interference and covering-up Wall Street felonious activity than in doing its job to protect investors.
In fact, most thinking upright bipeds came to that conclusion years ago when they understood the import of Reg SHO's grandfathering provision, or saw the SEC's Christopher Cox kibosh the subpoenas into the activities of some connected journalists, or allow the two year stock manipulation in cases like NFI and OSTK.
But it is always nice to see the mainstream press figure it out, albeit years late. And buried as far back as it can be buried.
This article about says it all.
My favorite takeaway:
"...extraordinarily lax enforcement by the SEC and ... may even indicate a cover-up by the SEC," Specter said. The SEC's handling of the matter, including a review of the attorney's allegations by the agency's inspector general, "has all of the earmarks of the obstruction of justice," he said."
Wow. Not much to quibble with there. The nation's top securities cop is basically either so incompetent that it can't police a subway turnstile, or so crooked that it makes 1920's Chicago look like a priory.
Is that bad? The country's securities regulator appears to be involved in a COVER-UP (hmmmm, which blog has been using that term to describe the SEC's actions since day one?) and seems to be obstructing justice rather than punishing wrongdoing?
"All the earmarks of obstruction of justice."
Is that like the local sheriff being caught dead drunk and covered with blood, wielding a knife over the body of a butchered victim, screaming, "Die Die Die!!!" has all the earmarks of a suspicious death?
How bad does this have to get before a special prosecutor is named, and the self-protection engine at the SEC is exposed for what it is? Or are they going to allow the agency whose latest investigation has resulted in an apparent cover-up, pretend to investigate its handling of that cover-up, in the hopes that this time it won't have all the earmarks of obstructing justice?
Folks, the NY press is busy arguing for less regulation, pretending that the reason Wall Street is losing business faster than a Hummer burns premium is due to too much restrictive regulation, rather than because its cops' actions are confirmation that crime pays handsomely, to anyone with a working cerebral cortex.
Jim Cramer basically wipes his backside with an SEC subpoena, understanding that it is about as serious as kleenex because the Commission is bought and paid for, and yet we are supposed to keep investing in the market so the hedge funds who prowl the markets like bucaneers can mug and rob us with brazen impunity, fearless of retribution of any sort.
This is nuts.
How long does this have to go on, and how obvious does it have to be, before even a Wall-Street financed Congress figures it out, and brings in adult supervision to clean up the cesspool?
Maybe the SEC can "study Congress' conclusions" for a year or two, as they have with the evidence of blatant thievery from naked shorting, while they do nothing and allow investors to be brutalized out of everything? That seems to be popular there. Do nothing while holding the door of the getaway car. And if you need to engage in a little Watergate-style cover-up and obstruction of justice, hey, why not?
I have been writing fewer blogs over the last few weeks because I am basically sickened by the blatant corruption evidenced in every move of the regulators and the market. I feel like I have said it all. Over and over. There isn't much left to say. "Look, another investor having his life savings stolen, while the country loses another business, so some pencil-necked miscreant on Wall Street can update his G-5 interior!" What more needs to be said?
And the media pretends that it isn't happening. None of it. Soviet Russia would have been green with envy over the mind control and media lock-down on the truth in play here. It is really the triumph of capitalism that our media can be more censored than a dictatorship. And yet, try reading anything about this. Or about the SIA spreadsheet showing countless billions FTD and FTR. Or the massive ongoing manipulations by a handful of well known hedge funds and prime brokers in stocks that have been on the SHO list for years.
Why is that? From the article:
"These findings paint a picture of a troubled agency that faces serious questions about public confidence, the integrity of its investigations" and its ability to protect investors large and small evenhandedly, Grassley said. The SEC "circled the wagons and it shot a whistle-blower," he said."
That is political-speak for, "They are a bunch of crooked rat ######## incapable of performing their job."
Time for a special prosecutor, just as in 1933, when the Pecora hearings resulted in the creation of the SEC. Fitting that a special prosecutor should be called in to dismantle the agency, and prosecute the miscreants there who believe themselves to be above the rule of law.
Get the emails cranked up. It's time.
Copyright ©2007 Bob O'Brien
http://www.thesanitycheck.com/BobsSanityCheckBlog/tabid/56/EntryID/565/Default.aspx
Read it and weep -
Number 2-4
Changes are a coming -
http://www.sia.com/regulatory_news/html/pending.html
emit...
Please do that. God forbid you should permit diverse opinion here. Very dangerous, free speech.
jeff - Do not respond the the FUD
The effort may haft to be taken onto a forum on Agoracom.com; I believe they are working up a Self-Monitoring application, they'v always worked with longs on allowing pro-boards on a subject and being located in Canada can possibly keep the ACLU free-speechers at bay for our message.
emit...
The insiders would dump first. And make evem more money.
dunno why the board was started - stumbled across it same as you.
i'm just an anonymous alias on a chat board - what do I know.
My biggest beef with the SEC is that I think that they should give ME NOTICE before suspending stock. That way I can preserve my capital and invest elsewhere. Once I have safely removed my position, then and only then should the SEC be able to suspend trading.
I'm thinking of people who believe--as many do--that everything bad that happens to "their" stock is the fault of "Shorty", the SEC, or both.
Why was this board started?
flush out insider traders. period.
who is 'you guys' and what 'management' am i pro on?
i'm not following your comment..
the SEC is corrupt as hell! many others are too. i have problems with all the rot and lies.
Flush out whom? They only pay bounties for insider trading. I thought you guys were pro-management.
Insider Trading: Information on Bounties
...Reward of up to 10% of the civil penalty... Let's flush 'em out!!!
(http://www.sec.gov/divisions/enforce/insider.htm)
Section 21A(e) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. 78u-l(e)] authorizes the Securities and Exchange Commission ("Commission") to award a bounty to a person who provides information leading to the recovery of a civil penalty from an insider trader, from a person who "tipped" information to an insider trader, or from a person who directly or indirectly controlled an insider trader. This pamphlet is designed to provide interested persons with information on bounties and the Commission's rules for making a bounty application. Section 21A(e) of the Exchange Act and the Commission's bounty rules are set out at the end of this pamphlet.
What is "Insider Trading?"
"Insider trading" refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped" and securities trading by those who misappropriate such information. Examples of insider trading cases that have been brought by the Commission are cases against: corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments; friends, business associates, family members, and other "tippees" of such officers, directors, and employees, who traded the securities after receiving such information; employees of law, banking, brokerage and printing firms who were given such information in order to provide services to the corporation whose securities they traded; government employees who learned of such information because of their employment by the government; and other persons who misappropriated, and took advantage of, confidential information from their employers.
Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the Commission has treated the detection and prosecution of insider trading violations as one of its enforcement priorities.
How Much May be Paid as a Bounty?
Insider trading may result in enforcement action by the Commission or in criminal prosecution by the Department of Justice. The Exchange Act permits the Commission to bring suit against insider traders to seek injunctions, which are court orders that prohibit violations of the law under threat of fines and imprisonment. The Commission may also seek other relief against insider traders, including recovery of any illegal gains (or losses avoided) and payment of a civil penalty. The amount of a civil penalty can be up to three times the profit gained (or loss avoided) as a result of insider trading.
The Commission is permitted to make bounty awards from the civil penalties that are actually recovered from violators. With minor exceptions, any person who provides information leading to the imposition of a civil penalty may be paid a bounty. However the total amount of bounties that may be paid from a civil penalty may not exceed ten percent of that penalty.
How Will the Commission Make Bounty Determinations?
All Commission determinations regarding bounties including whether to make a payment, to whom a payment shall be made, and the amount of a payment (if any), are in the sole discretion of the Commission. Any such determination is final and not subject to judicial review. Nothing in the Commission's rules or in this pamphlet is intended to limit the Commission's discretion with respect to bounties.
In making determinations regarding bounty applications the Commission will be guided by the purposes of the bounty provisions. These purposes include the intent of the United States Congress to encourage persons with information about possible insider trading to come forward. The Commission will also consider other factors that it deems relevant. Examples of other factors that may be relevant are: the importance of the information provided by an applicant; whether the information was provided voluntarily; the existence of other applications in the matter; and the amount of the penalty from which bounties may be paid.
Normally, the Commission will not make any determination on a bounty application until a payment of a penalty is both ordered by a court and recovered. A person who files an application meeting the requirements of the Commission's rules will be notified of the Commission's determination on the application.
How and When Do You Apply for a Bounty?
An application must be clearly marked as an "Application for Award of a Bounty," and must contain the information required by the Commission's rules. The application must give a detailed statement of the information that the applicant has about the suspected insider trading.
Any person who desires to provide information to the Commission that may result in the payment of a bounty may do so by any means desired. The Commission encourages persons having information regarding insider trading to provide that information in writing, either at the time they initially provide the information to the Commission or as soon as possible afterwards. Providing information in writing reduces the possibility of error, helps assure that appropriate action will be taken, and minimizes subsequent burdens and the possibility of factual disputes. In any event, a written application for a bounty must be filed within 180 days after the day on which the court orders payment of the civil penalty.
Can You Apply for a Bounty Anonymously?
The Commission recognizes that there may be instances when a bounty applicant wishes to remain temporarily anonymous. The bounty rules take these instances into account. While the Commission will only award bounties to applicants who provide their identity and mailing address, that information may be added by a later amendment to the application. The amendment must be filed within 180 days after the entry of the court order requiring the payment of the penalty upon which the bounty is based. An anonymous applicant who fails to file such an amendment (and anyone who fails to make a written application) runs the risk of losing eligibility for a bounty through lapse of time and ignorance of the fact that a penalty has been recovered.
Absent compelling cause, the Commission ordinarily does not disclose the identity of a confidential source. In some instances however disclosure of that identity will be legally required, or will be essential for the protection of the public interest. For example, a court may order disclosure during litigation, or the Commission may need to present the testimony of a bounty claimant to ensure the success of an enforcement action. Consequently while the Commission and its staff will give serious consideration to requests to maintain the confidentiality of a source's identity, no guarantees of confidentiality are possible.
Statutory and Regulatory Provisions
Section 21A(e) of the Exchange Act
[T]here shall be paid from amounts imposed as a penalty under this section and recovered by the Commission or the Attorney General, such sums, not to exceed 10 percent of such amounts, as the Commission deems appropriate to the person or persons who provide information leading to the imposition of such penalty. Any determinations under this subsection, including whether, to whom, or in what amount to make payment, shall be in the sole discretion of the Commission, except that no such payment shall be made to any member, officer, or employee of any appropriate regulatory agency, the Department of Justice, or a self-regulatory organization. Any such determination shall be final and not subject to judicial review.
Subpart C of Part 201 of Title 17 of the Code of Federal Regulations
Procedures Pertaining to the Payment of Bounties Pursuant to Subsection 21A(e) of the Securities Exchange Act of 1934
Rule 61 Scope of subpart
Section 21A of the Securities Exchange Act of 1934 authorizes the courts to impose civil penalties for certain violations of that Act. Subsection 21A(e) permits the Commission to award bounties to persons who provide information that leads to the imposition of such penalties. Any such determination, including whether, to whom, or in what amount to make payments, is in the sole discretion of the Commission. This subpart sets forth procedures regarding applications for the award of bounties pursuant to subsection 21A(e). Nothing in this subpart shall be deemed to limit the discretion of the Commission with respect to determinations under subsection 21A(e) or to subject any such determination to judicial review.
Rule 62 Application required.
No person shall be eligible for the payment of a bounty under subsection 21A(e) of the Securities Exchange Act of 1934 unless such person has filed a written application that meets the requirements of this subpart and, upon request, provides such other information as the Commission or its staff deems relevant to the application.
Rule 63 Time and place of filing.
Each application pursuant to this subpart and each amendment thereto must be filed within one hundred eighty days after the entry of the court order requiring the payment of the penalty that is subject to the application. Such applications and amendments shall be addressed to: Office of the Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-9303.
Rule 64 Form of application and information required.
Each application pursuant to this subpart shall be identified as an Application for Award of a Bounty and shall contain a detailed statement of the information provided by the applicant that the applicant believes led or may lead to the imposition of a penalty. Except as provided by Rule 65 of this subpart, each application shall state the identity and mailing address of, and be signed by, the applicant. When the application is not the means by which the applicant initially provides such information, each application shall contain: the dates and times upon which, and the means by which, the information was provided; the identity of the Commission staff members to whom the information was provided; and, if the information was provided anonymously, sufficient further information to confirm that the person filing the application is the same person who provided the information to the Commission.
Rule 65 Identity and signature.
Applications pursuant to this subpart may omit the identity, mailing address, and signature of the applicant; provided that such identity, mailing address and signature are submitted by an amendment to the application. Any such amendment must be filed within one hundred eighty days after the entry of the court order requiring the payment of the penalty that is subject to the application.
Rule 66 Notice to applicants.
The Commission will notify each person who files an application that meets the requirements of this subpart, at the address specified in such application, of the Commission's determination with respect to such person's application. Nothing in this subpart shall be deemed to entitle any person to any other notice from the Commission or its staff.
Rule 67 Applications by legal guardians.
An application pursuant to this subpart may be filed by an executor, administrator, or other legal representative of a person who provides information that may be subject to a bounty payment or by the parent or guardian of such a person if that person is a minor. Certified copies of the letters testamentary, letters of administration, or other similar evidence showing the authority of the legal representative to file the application must be annexed to the application.
Rule 68 No promises of payment.
No person is authorized under this subpart to make any offer or promise, or otherwise to bind the Commission with respect to the payment of any bounty or the amount thereof.
You ask me to be a mod - if it can't be purley NSS media-proactive data, i may move on... ask matt.
The Moron's in this game include OQuin, RobertShipiro, RobertMaheu, Senator Spector/Dodd etc., etc., and an emerging US shareholder concensus.
liquid ... ther's the first, u gona delete
e
faulk is a complete and total moron.
liquid, have you spoken to the SEC or your congressman regarding CKYS? And if so what type of feedback did you get?
The Fall of the SEC
by Mark Faulk
Mark this week down on your calendars. In fact, do it Jim Cramer style: take a sharpie and write in big black letters across the entire week “THIS IS THE BEGINNING OF THE END!”
After years of calls for stock market reform being ignored by the SEC, by Congress, by Wall Street, and by the media, the tide has finally begun to turn. After decades of the average investor being first lured into, then robbed blind in the stock market by Wall Street insiders, major brokerage firms, and hedge funds while our federal officials sat idly by and watched, or worse yet, participated in the splitting up of the loot, there is light at the end of what up until now has been a dark tunnel. A couple of major events this week signaled impending defeat for those who have conspired to rob our country blind in blatant disregard of the very values upon which America was founded.
The first event took place, as is often the case in the world of politics, behind closed doors. A Tuesday afternoon phone call from a person who has long been a behind-the-scenes advocate for returning honesty and integrity to our financial markets first gave me reason to feel renewed hope. This is someone who has been working quietly but tirelessly to help those of us who have been sounding the alarm for years, the same person who helped to set up a Senate Banking Committee hearing over two years ago, only to have it killed by then Banking Committee Chairman Sen. Richard Shelby (R-AL).
This is the gist of that phone call: Senator Bob Bennett (R-UT), one of the few members of Congress whose hands seem to be clean enough to speak out for America on this issue, has been educating the new Democratic Chairman of the Banking Committee, Sen. Chris Dodd (D-CT) on the issues of stock market fraud. According to Bennett, Dodd is “open to discussing the issue,” and to possibly reopening the hearing into the SEC in the Senate Banking Committee…or should I say open to conducting the hearings that were never allowed to take place in 2005. Meetings were set up to discuss the issue, and I forwarded a few relevant articles to give to Sen. Dodd in hopes of showing that even recent tepid efforts by the SEC to deal with fraud were nothing more than slaps on the wrists, fines generally amounting to a fraction of the damage done to companies and shareholders.
Along with the articles to back it up, I sent this short email at 3 in the morning after driving 350 miles from beautiful Lubbock, TX. on a business trip, back home to Middle America, USA:
Here are a couple of recent articles about hedge funds and naked short selling. The issue is finally beginning to receive some mainstream limited press, and the SEC is still essentially doing nothing to stop it. Hedge funds still aren't regulated, and the ones that are caught receive slaps on the wrist.
In recent months, in case after case, the SEC has negotiated fines that have a huge disconnect with the amount of money stolen and the damage done to companies and investors, and usually with the perpetrator "neither denying or admitting guilt." The fines are so small that they have become merely a cost of doing business.
Recently, Eagletech won a decision against the DTC to have an estimated 40,000 pages of documents concerning alleged trading violations released to the company's attorneys, although no charges have been filed yet.
Novastar has had some favorable recent rulings as well, but again, nothing major.
Also, a 21 year-old kid was arrested just last week who hacked into online accounts of investors and used their accounts....and their money....to manipulate the price of 17 penny stocks. One CEO, Hugo Cancio of Fuego Entertainment (FUGO.OB), was on my radio show last week, and described how his stock, which has only 9 million free-trading shares, was manipulated from over $1.40 a share to under .20 in a matter of weeks (the stock actually lost 90% of its value in three trading days), by this same 21 year-old. My main point on the show was that the SEC and the stock market regulators should take this as a sign that something is terribly wrong with the system. If a 21 year-old can do severe damage to 17 companies that easily, imagine what damage "the professional con artists" can, and are, doing.
This is beyond crisis stage, and I firmly believe that the destruction of our incubator companies by unregulated hedge funds, and the moving of massive amounts of our country's wealth offshore, has directly contributed to our country's recent downslide in our position as the world economic leader. Forget about outsourcing our jobs, we're outsourcing our wealth, and killing jobs even before they are created.
This is an issue that rests squarely with the SEC, DTC, and Wall Street, whose neglect and even collusion with hedge funds has resulted in record profits for brokers and obscene wealth for hedge fund managers....at the expense of our country's economic well-being. This is a house of cards, and it's teetering dangerously close to collapse.
Hope this helps....if I can do anything else, please feel free to call me. Thanks for all your help, without people like you, this would be a lost cause, and the damage to our economy would eventually become irreversible.
Did a single email dashed off at 3 in the morning, and the accompanying articles help shed a little light on the problems we face as investors, and America faces as a nation in crisis? It’s hard to say, but I do know this: more than one senator has said that the only way to force action from Congress is to speak out, to let them know that America wants our broken system fixed. Or better yet, dismantled altogether and reassembled in a way that safeguards against fraud, instead of one filled with built-in loopholes.
So here’s the plan: Every American who feels as if they have been wronged by a corrupt stock market, and indeed, every American who understands the financial drain on our country and the loss of jobs and productivity due to victimized companies, needs to raise their voices in unison. AMERICA NEEDS TO SPEAK OUT, AND SPEAK OUT NOW.
When Senator Chris Dodd returns to work next Monday, he needs to walk into an office that has been buried in emails and phone calls, all calling for one thing – a Senate Banking Committee investigation into fraud on Wall Street, and a thorough investigation into the SEC.
Two other more public events capped off the week that signaled the beginning of the end for the SEC. On Thursday, the day after meetings were held in Washington, two other senators renewed their own attacks on the SEC in a case involving SEC attorney Gary J. Aguirre, who was fired for attempting to question Wall Street kingpin John J. Mack.
Senator Charles Grassley (R-IA) said that “The S.E.C. should have taken Mr. Aguirre’s allegations seriously. Instead, it circled the wagons and shot the whistle-blower — an all-too-familiar practice in Washington.” He also said that the SEC’s investigation into the case “was plagued with problems from its beginning to its abrupt conclusion. The termination of Mr. Aguirre by the S.E.C. was highly suspect given the timing and circumstances.”
Senator Arlen Spector (R-PA) saved his harshest words for the SEC.’s inspector general, Walter J. Stachnik. Spector said that in all his years in the Senate he could not recall “an I.G. who said less, did less and was thoroughly inadequate in the investigation.”
An inquiry conducted by the Senate Judiciary and Finance Committees, and released on Thursday, said that “At best, the picture shows extraordinarily lax enforcement by the S.E.C. At worse, the picture is colored with overtones of a possible cover-up.”
Finally, members of Congress are beginning to say what advocates of stock market reform have known all along, that the SEC is as corrupt as the stock market that they are responsible for overseeing. While it is obvious that there are rank-and-file employees who are hardworking and honest, the corruption at the top of the SEC is way beyond criminal, it is treasonous.
AMERICA NEEDS TO SPEAK OUT, AND SPEAK OUT NOW!
To top off a week that will be remembered as one of the turning points in the battle to return honesty and integrity to our financial markets, Overstock.com filed a $3.5 billion lawsuit in California state court Friday against 10 of the largest U.S. securities firms, accusing them of participating in a “massive, illegal stock market manipulation scheme” to defraud the company and its shareholders.
Overstock's suit names Morgan Stanley, Goldman Sachs, Bear Stearns, Bank of America, Bank of New York, Citigroup. Credit Suisse, Deutsche Bank, Merrill Lynch, and UBS as defendants in the lawsuit.
Patrick Byrne has been under relentless attack from a number of financial media reporters, many of whom have ties to hedge funds and short sellers themselves, for joining forces with other stock market reform advocates in calling for a major overhaul of our financial system. That Congress has finally begun to awaken to the problem at the same time that Overstock’s lawsuit is filed is poetic justice for Byrne, and vindication for those who have battled against power, greed, and wealth in an effort to save our country from financial ruin.
As satisfying as this week has been to those of us who have spent years fighting a battle that at times seemed at times to be almost a hopeless cause, we cannot rest in our efforts. Now is the time to sound the alarm even louder than before, to spread the word across our country before it’s too late. Now is the time to let Senate Banking Committee Chairman Chris Dodd know that this issue will not simply go away.
One last time, in unison:
AMERICA NEEDS TO SPEAK OUT, AND SPEAK OUT NOW!
oh and for one people talk to me and know me so really let someone alter a email and try to make me look bad well i kinda feel special that way like a celebrity or something lol but no people who talk to me know me for real anyone contact joew.e
no i was being framed and i think that is ridiculous
Liquid - why did you delete post #2 from joenatural? Is there something you are hiding or no?
Yes, Emit, EXCELLENT slideshow. It should be made into a DVD and sold to BlockBuster, NetFlix, you know what I mean. :)
Dr. Byrne's Naked Short Selling/Fail To Deliver Slideshows
Dr. Byrne, CEO of Overstock.com, has created a slideshow series that explains in no uncertain terms everything you would ever need to know about naked short selling, and the systemic risk it presents to the US equities markets. The "Dark Side Of The Looking Glass" slideshow represents the first time the entire problem has been articulated in an easy to follow slideshow format, narrated by Byrne himself. Well worth the time to listen to.
The series is located at the Businessjive website (a great site and well worth visiting for other reasons):
Slideshow: Naked shorting explained.. active link to slideshow found here:
http://thesanitycheck.com/DrByrneSlideshows/tabid/107/Default.aspx
***US courts to decide on ‘scheme liability’***
"US courts are considering on Monday whether to bless a new legal theory thought up by plaintiffs’ lawyers that could put banks, lawyers and business partners on the hook for billions of dollars when a public company goes bust because of fraud."
http://www.ft.com/cms/s/b66d9af0-b478-11db-b707-0000779e2340.html
- - - - -
And the beat goes on - and on and on.
Courtasy jcline - investigatthesec.com
Read about Goldman Sachs
Goldman Sachs Added as Defendant in Fannie Mae Suits
"Complaints allege that Goldman, Sachs & Co. violated U.S. securities laws while allegedly arranging Fannie Mae-sponsored bond deals, the brokerage said in its quarterly report with the Securities and Exchange Commission (SEC). The deals relate to real estate mortgage investment conduits, which are bonds collateralized with mortgage-backed securities, MarketWatch reported."
http://cmkxunitedforum.proboards70.com/index.cgi?action=display&board=general&thread=1160188...
"Ten of Nation's Top Investment Firms Settle Enforcement Actions Involving Conflicts of Interest Between Research and Investment Banking
Historic Settlement Requires Payments of Penalties of $487.5 Million, Disgorgement of $387.5 Million, Payments of $432.5 Million to Fund Independent Research, and Payments of $80 Million to Fund Investor Education and Mandates Sweeping Structural Reforms
The ten firms against which enforcement actions are being announced today are:
Bear, Stearns & Co. Inc. (Bear Stearns)
Credit Suisse First Boston LLC (CSFB)
Goldman, Sachs & Co. (Goldman)"
"A lawsuit filed in Suffolk Superior Court in 2004 alleged that a hedge fund operated by the Boston firm had been executing naked short sales through an account at Goldman Sachs, targeting American Business Financial Services stock."
http://cmkxunitedforum.proboards70.com/index.cgi?board=general&action=display&thread=1138722...
"And even then, let’s say that they continue to sell naked, helping out their hedge fund clients – you know, a big house like UBS or Lehman or Bear or Goldman just sells and sells, day after day."
http://cmkxunitedforum.proboards70.com/index.cgi?board=general&action=display&thread=1137782...
"Early last year, Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) agreed to pay $40 million each to settle Securities and Exchange Commission allegations about laddering. JPMorgan previously had paid $25 million to settle an SEC case arising out of the same investigation, although the agency didn't accuse JPMorgan of laddering or other market manipulation. "
http://cmkxunitedforum.proboards70.com/index.cgi?board=general&action=display&thread=1145929...
"a scheme that implicates hedge funds, Smith Barney, Goldman Sachs and a aptly named company called “Flip Firm”, who helped to cover the trail of the naked short sellers"
http://cmkxunitedforum.proboards70.com/index.cgi?board=general&action=display&thread=1139876...
"Morgan Stanley, Bear Stearns and Goldman Sachs Group Inc. have a hammerlock on providing hedge fund services after spending more than $200 million a year on trading systems, offering more stock for short sales and courting former employees who left to start their own hedge funds, according to a survey by Tremont Capital Management Inc., an industry consulting firm in Rye, New York."
http://cmkxunitedforum.proboards70.com/index.cgi?board=general&action=display&thread=1142527...
"Someone explain to me how Goldman and whomever else signed off on the DD for REFCO when it IPOed last August missed the CEO's hidden $500 million in debt and now this. Something is broken here folks, and broken bad.."
http://cmkxunitedforum.proboards70.com/index.cgi?board=general&action=display&thread=1142421...
"Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and 10 other banks had outlined in a Dec. 16 letter to the Fed that they would halve the number of unconfirmed transactions by May, compared with the amount outstanding in September."
http://cmkxunitedforum.proboards70.com/index.cgi?board=general&action=display&thread=1140140...
"The Post states that regulators will be looking for the trading and customer ledgers of Bear Stearns, Morgan Stanley and Goldman Sachs."
http://cmkxunitedforum.proboards70.com/index.cgi?board=general&action=display&thread=1140122...
"All 20 members of DTCC’s board, including Jill M. Considine, Chair and CEO, and Donald F. Donahue, COO, DTCC; Jonathan E. Beyman, CEO, Lehman Brothers (NYSE: LEH); Randolph L. Cowen, Global Head of Technology and Operations, Goldman Sachs Group (NYSE: GS); Dianne Schueneman, Senior VP, Merrill Lynch & Co. (NYSE: MER), New York; Douglas Shulman, President, NASD, Inc., Washington, DC; and Timothy J. Theriault, President, The Northern Trust Co. (NASDAQ: NTRS); and Catherine R. Kinney, President and Co-Chief Operating Officer, New York Stock Exchange, had been asked by Shichtman to “reign in” Thompson and other high executives of DTCC following two documented instances of media tampering involving FinancialWire."
http://cmkxunitedforum.proboards70.com/index.cgi?board=general&action=display&thread=1140013...
"Utah and Connecticut regulators' first line of attack will be to get Wall Street firms' trading records via the Depository Trust & Clearing Corporation, which tracks and settles all stock trades. Regulators will be looking for the trading and customer ledgers of Bear Stearns, Morgan Stanley and Goldman Sachs, which all have large and highly lucrative clearance operations"
http://cmkxunitedforum.proboards70.com/index.cgi?board=general&action=display&thread=1140047...
"Goldman said on Dec. 16 that it paid Chief Executive Officer Henry Paulson about $37 million in shares and stock options."
http://cmkxunitedforum.proboards70.com/index.cgi?board=general&action=display&thread=1137020...
"This year’s bonus total for Wall Street was over $21 Billion with Goldman Sachs handing out an average of $500,000 to their employees. Abelow worked for Goldman Sachs."
http://cmkxunitedforum.proboards70.com/index.cgi?board=general&action=display&thread=1140954...
"The original Stockholders of the Federal Reserve Banks in 1913 were the Rockefeller's, JP Morgan, Rothschild's, Lazard Freres, Schoellkopf, Kuhn-Loeb, Warburgs, Lehman Brothers and Goldman Sachs."
http://cmkxunitedforum.proboards70.com/index.cgi?board=general&action=display&thread=1141000...
December 3, 2002
Goldman Sachs (NYSE: GS ), Morgan Stanley (NYSE: MWD), the Salomon Smith Barney unit of Citigroup, the Deutsche Bank Securities unit of Deutsche Bank and the U.S. Bancorp Piper Jaffray unit of U.S. Bancorp (NYSE: USB ) each agreed to pay $1.65 million in fines for allegedly violating e-mail record-keeping requirements. The fines were assessed to each company by the SEC, the New York Stock Exchange and the NASD. In accepting the penalties, the broker-dealers neither admit nor deny the allegations.
December 20, 2002
Late last night regulators and investment banks agreed to a series of fines and sanctions in response to Wall Street's mistreatment of individual investors through bastardized, conflicted research.
The total tab in fines is $1 billion. Citigroup (NYSE: C), parent of Salomon Smith Barney, took the largest hit, at $325 million, but a baker's dozen of other Wall Street firms got fines, including Credit Suisse First Boston (NYSE: CSR) at $150 million, and Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MWD) at $50 million apiece. On top of these fines the companies will be required to fund a trust as seed capital for an independent stock-analysis entity.
April 4, 2003
Spear, Leeds & Kellogg, a unit of Goldman Sachs, and four employees agreed to be censured and fined $435,000 for alleged trading misconduct on the floor of the exchange between 1999 and 2002. Although Spear's Amex floor operations were sold off in late 2002, it remains the largest NYSE specialist outfit.
April 28, 2003
Goldman Sachs was found to have “issued research reports that were not based on principles of fair dealing and good faith .. contained exaggerated or unwarranted claims.. and/or contained opinions for which there were no reasonable bases.” The firm was fined $110 million dollars, for a total of $119.3
million dollars in fines in six months.
September 4, 2003
In a settlement with the SEC, Goldman Sachs & Co., a unit of Goldman Sachs Group (NYSE: GS ), agreed to pay $4.3 million in restitution and a $5 million penalty related to improper trading in U.S. Treasury securities and futures. Without admitting or denying the findings, Goldman consented to the SEC's order. The restitution and penalty relate to improper trading in 30-year bonds on Oct. 31, 2001, that the SEC alleges was caused by embargoed information received by then senior economist John Youngdahl. The SEC has filed a civil complaint against Youngdahl and Peter Davis, a Washington, D.C.-based consultant, who allegedly supplied Youngdahl with a tip that the U.S. Treasury was about to announce the suspension of the 30-year bond. Youngdahl has also been charged with seven counts of criminal activity by the U.S. attorney for the Southern District of New York. Davis, also charged by the U.S. attorney, has already pleaded guilty. A lawyer for Youngdahl says that his client intends to fight the charges. (See "Goldman Scuffs Its Shoes.")
March 15, 2004
Goldman Sachs& Cowas (“Goldman”)censured and fined $15,000 for the following conduct. On 21 occasions during the fourth quarter 2002, and on 23 occasions during the first and second quarter of 2003, Goldman failed to expose customer orders it represented as agent for 30 seconds prior to entering offsetting and interacting firm proprietary orders. (ISE Rule 717(d)) Goldman failed to maintain satisfactory written procedures to assure compliance with proper facilitation of customer orders. (ISE Rule 401) The fine was composed of $10,000 for violations of 717(d) and $5,000 for the written supervisory procedures violation.
July 1, 2004
Goldman Sachs Group agreed to pay $2 million to settle an administrative proceeding with the SEC. According to the SEC, sales traders at Goldman violated the waiting period for marketing an IPO before a registration became effective. Additionally, the SEC alleged that a Goldman executive spoke to the media about an IPO by PetroChina (NYSE: PTR) before an initial registration was filed. In the settlement, Goldman neither admitted nor denied the findings.
February 17, 2005
Following several months of negotiations, the parent companies of the five largest specialists at the New York Stock Exchange revealed nearly $240 million in total fines and restitution related to alleged NYSE rule violations. In the agreements in principle, still being finalized by the SEC and NYSE, the companies claim they will neither admit nor deny findings that allege the specialists failed to maintain a fair or orderly market. The Spear, Leeds & Kellogg unit of Goldman Sachs (NYSE: GS ) will pay a total of $45.5 million.
January 26, 2005
Goldman Sachs and Morgan Stanley have agreed to pay a combined $80m (£43m) to settle allegations that they manipulated markets to ensure big first day gains in flotations during the stock market boom.
The Wall Street banks were accused of guaranteeing clients bigger allocations in initial public offerings if they agreed to buy more of the shares when they started trading. The scheme is known on Wall Street as "laddering".
March 22, 2005
The NASD fined a Goldman Sachs Group Inc. unit $1 million for hiding initial public offering allocations after being pressured by clients demanding anonymity. The regulator said Spear, Leeds & Kellogg LP, which in January was renamed Goldman Sachs Execution & Clearing LP, used its system to circumvent the Depository Trust Corp.'s IPO Tracking System, which lets underwriters monitor the quick trading, or "flipping," of new issues. DTC provides clearance and settlement services to the securities industry. The NASD fined a Goldman Sachs Group Inc. unit $1 million for hiding initial public offering allocations after being pressured by clients demanding anonymity. The regulator said Spear, Leeds & Kellogg LP, which in January was renamed Goldman Sachs Execution & Clearing LP, used its system to circumvent the Depository Trust Corp.'s IPO Tracking System, which lets underwriters monitor the quick trading, or "flipping," of new issues. DTC provides clearance and settlement services to the securities industry.
April 1, 2005
In Indonesia, Goldman has had an ongoing problem largely ignored by the U.S. media. According to the Hong Kong Standard, on 3-4: “Goldman Sachs Group colluded with Indonesia's state oil company, Pertamina, to ensure Frontline buys two supertankers for as much as US$56 million (HK$436.8 million) below the market price in July 2004, the country's anti-monopoly agency said.” Goldman was fined $15.76 million by Indonesia, a levy that came in close proximity to another fine, in which Goldman was fined $1 million by the NASD in a case that involved withholding IPO information from the market.
June 9, 2005
NASD today announced that it has ordered three firms - Morgan Stanley & Co, J.P. Morgan Securities, Inc., and Goldman, Sachs & Co. - to pay more than $2.9 million following sales of restricted securities in violation of lock-up agreements as required by Each of the firms, or entities or individuals affiliated with the firms, acquired the securities from issuers in private placements prior to each issuer's IPO. Each of the firms subsequently served as an underwriter of the issuer's IPO. Under NASD rules, certain of the private placement securities were deemed underwriting compensation and were restricted from sale for a period of one year from the date of the IPO. In addition, NASD rules provided that if a member firm agreed to restrict the sale of securities for an additional period of time - one or two years - additional discounts would be provided to the value assigned to the shares for purposes of determining underwriting compensation.NASD rules.
August, 2005
The NASD censured and fined 20 firms a total of $1.65 million for late and inaccurate reporting of municipal bond trades. Goldman Sachs was fined $140,000.
-----------------
http://cmkxunitedforum.proboards70.com/index.cgi?board=general&action=display&thread=1170524...
Dec. 11, 2006
Dear Ms. Keefe:
Kentucky Securities Regulator
This is ///// Scott in /////// Kentucky. First I want to Thank-You for kindly answering my letter that I sent to our Governor in regards to Settlement-Failures and Naked-Short-Selling a few weeks back.
If you can find a few extra minutes please listen to this audio-presentation which occurred today on 'Christian Financial Radio' with Dr. Susan Trimbath, former Operations Manager for the DTCC - It is very informative on the issue. The ladies do a discussion then a short Q/A on SRO's/Broker-Dealers/ the UTAH law and the dematerialization of paper certificates... It is very professional and insightful.
Colleen, please do something to just make the brokerages settle the darn trades as the law requires. Companies staying on SHO list a year is unacceptable - More n more companies are requesting their NOBO list and discovering large imbalances... Let me know if you would like a list of them and their intentions, or if there’s any info I can help you with please just let me know. I tried sending this to your email but it was returned.
Please listen to Dr. Susan Trimbath, former Operations Manager for the DTCC - Her conversation today on Shorting/NSS/Fails-To-Deliver on 'Christian Financial Radio.' Look for an replayable archive link of the broadcast later today and accessible for a month at: www.cfrn.net
~ HAPPY HOLIDAYS ~
Respectfully,
////////////////////
Please see this –
Rule Number S7-120-06: Comments on Proposed Amendments to Regulation SHO
Robert J. Shapiro
September 14, 2006
http://www.sec.gov/comments/s7-12-06/rjshapiro5967.pdf
``````````````````````````````
To: Securities Exchange Commission Rules Committee
Subject: File No. S7-23-03: Comments on the "Proposed Rule: Short Sales," 17 CFR 240 and 242, Release No. 34-48709
From: Robert J. Shapiro
Date: December 24, 2003
I am Robert J. Shapiro, chairman of Sonecon, LLC, an economic advisory and investment firm in Washington, D.C. I am also a Senior Fellow of the Brookings Institution and Counselor to the U.S. Conference Board. From1998 to 2001, I was Under Secretary of Commerce for Economic Affairs. Previous to that, I was Vice President and co-founder of the Progressive Policy Institute and principal economic advisor to Governor Bill Clinton in his 1991-1992 presidential campaign. I hold a Ph.D. from Harvard University.
I commend the Securities Exchange Commission (SEC) for, at long last, addressing the issue of abuses in short sales. No one questions that the legitimate use of short sales often promotes the efficiency and stability of our capital markets. Short sales alert investors to other investors' judgments that certain firms are over-valued; short sales also enable market makers, as necessary, to provide liquidity and offset temporary imbalances in the supply and demand for particular stocks. These legitimate and positive uses of short sales depend on two particular features of the transaction - namely, that the short sale is covered as required by SEC regulation, and not undertaken to manipulate a stock's price. Without these features, the use of uncovered or "naked" shorts to manipulate the price of targeted shares can present a significant threat to investors. When carried out on a large and widespread scale, naked shorts threaten the basic integrity of equity markets. In my judgment, the Commission's proposals would not materially reduce these threats.
Concern about the illegitimate use of short sales is as old as the SEC itself. The Commission writes that "Congress, in 1934, directed the Commission to 'purge the market' of short selling abuses, and in response, the Commission adopted restrictions that have remained essentially unchanged for over 60 years."1 It has been evident for some time that the regulations adopted in 1938, principally Rule 10a-1 restricting short selling in a stock while its price is falling, have not stemmed illegitimate short-selling. This failure suggests systemic problems with the short sale system that have eroded the basic integrity of the equity markets, including: 1) broker-dealers and investment firms apparently participating in the creation of significant numbers of sham short sales to artificially drive down the price of targeted firms, 2) apparently lax and faulty arrangements at the industry-owned Depository Trust and Clearing Corporation (DTCC) and its National Securities Clearing Corporation (NSCC) subsidiary that have allowed millions of uncovered shorts to persist in the system; and 3) the apparent incapacity or unwillingness of the SEC to enforce existing short sale regulation by investment companies, the DTCC and the NSCC.
The SEC has definitively acknowledged the inadequacy of current regulation by proposing to replace Rules 10a-1, 10a-2 and 3b-3 with new Regulation SHO. Moreover, the Commission also now acknowledges that one reason for the proposed change is the failure of existing arrangements to prevent naked short selling on a large scale, signified by extended failures to deliver shares on a sufficient scale to affect the price of individual equities:
"(A)t times, the amount of fails to deliver may be greater than the total public float. In effect, the naked short seller unilaterally converts a securities contract (which should settle in three days after the trade date) into an undated futures-type contract, which the buyer might not have agreed to or that would have been priced differently."2
When the number of uncovered short sales in a stock exceeds its public float-or even the total number of shares issued or outstanding--the only plausible explanation is a concerted and illegal effort by short sellers to flood the marketplace with counterfeit or fictitious shares, in order to artificially drive down the stock's price and increase the value of the shorts. Massive naked short sales turn the equity market into a form of monopoly pricing for the firms that fall victim to such sales, in which the short seller sets the price at a level guaranteed to provide a quasi-monopoly return. These actions, in effect, destroy the integrity of the market system for firms targeted by naked short sellers and create a direct transfer of wealth from existing shareholders to the illegal short sellers. The firms targeted for such manipulation are generally smaller, younger public firms - the type of company which has generated many of the technological and organizational innovations that have contributed so much to the increases in business investment and productivity of recent years. As relatively small and young companies with much fewer shares in their public floats than their older and larger counterparts, their individual decline or destruction also generally attracts little public attention.
These illegal short sellers cannot achieve pricing power over a firm by themselves, since it involves creating hundreds of thousands or even millions of phantom or non-existent shares in direct breach of numerous regulations and laws. This undertaking requires the collaboration of broker-dealers who will carry out short sales without transferring actual shares, and the tacit countenance of the market organizations and regulatory bodies charged with clearing and settling those short sales. The fact that naked short sales occur on this scale, therefore, points to serious problems involving compliance with short sale regulation at the investment firms conducting these transactions for their customers. It also points to troubling problems involving the enforcement of these rules at the NSCC, where these transactions are supposed to be cleared and settled in accordance with the rules, at the NSCC's corporate parent, the DTCC, and at the SEC offices entrusted with overseeing the DTCC, the NSCC and investment firms.
The DTCC describes its responsibilities in this area in very unambiguous terms:
It is the job of [the DTCC and NSCC] to provide an efficient and safe way for the buyer and seller to exchange securities and money, thus 'clearing and settling' the transactions. … NSCC steps into the middle of a trade, becomes a contra-party to both firms and guarantees completion of the transaction. This guarantee assures all members that NSCC will complete trades on the original terms."3
The DTCC and NSCC further guarantee that all trades, including short sales, are promptly cleared and settled-since 1995, within three business days:
NSCC guarantees and settles transactions between market professionals during this time period [three business days] to ensure sellers are paid and buyers receive their securities in a manner that reduces risk, cost and post-trade uncertainties. … NSCC guarantees that a trade will be completed once it enters our system as compared, which means all trade details from the buyer and seller match up."4
Despite these intentions, there is considerable evidence that market manipulation through the use of naked short sales has been much more common than almost anyone has suspected, and certainly more widespread than most investors believe. I have studied one form of illegitimate short selling, based on the use of a convertible warrant guaranteeing the investor the right to convert his investment into shares at the lowest public share price over some look-back period, minus a substantial discount. The use of this financial instrument, commonly called "death spiral financing," was widespread in the 1990s and the recent turn of the century, and created strong incentives for large-scale naked short sales focused on small and medium-size public companies. This particular instrument creates conditions under which an investor can profit by short-selling the firm in which he is otherwise invested: If the investor can drive down the firm's share price through short sales, he profits from his shorts while his convertible warrant protects the value of his original investment, regardless of how much the stock declines. The investor also can use his warrants to produce the shares he needs to eventually close his short positions.
The appeal of the death-spiral instrument to a short seller intent on driving down a firm's share price is clear: It eliminates economic risk, since the warrant guarantees the delivery of shares equal to the investment plus a large premium, regardless of the stock's price. However, a short seller without such a warrant can also virtually eliminate his financial risk by undertaking short sales on a scale sufficient to drive down the stock's price. Normally, a legitimate short seller increases his exposure by expanding his short position. For a short seller operating on a sufficient scale to affect the stock price, however, the more extensively he shorts a stock, the greater his prospects of profiting and the greater his profits will likely be.
The more the share price falls, the greater the short-seller's return; and the greater the percentage of tradable shares that the shorts account for, the greater the price decline. The only difficulty facing a short seller intent on manipulating a stock's price is securing enough shares to cover such large-scale short sales. The typical solution is the large-scale naked short sales that the Commission has found--in some cases greater than the total number of tradable, outstanding or issued shares in the firm being shorted. As the Commission notes,
[N]aked short sellers enjoy greater leverage than if they were required to borrow securities and deliver within a reasonable period, and they may use this additional leverage to engage in trading activities that deliberately depress the price of a security."
My own research has found, thus far, that a sample of more than 200 companies that appear to have been victimized by this new form of "bear raid" posted a combined market loss of more than $105 billion. Others also have found substantial evidence of the ill effects of naked short sales. Two European economists, Professors Pierre Hillion and Theo Vermaelen, tracked 467 issues of floating-price "death spiral" convertible warrants by 261 U.S. firms from December 1994 to July 1998.5 They found that despite the strong bull market of that period, the shares of 85 percent of those firms fell by an average of 34 percent in the year following the issue of the convertible instrument. Nor were these declines consistent with comparable firms that had not undertaken this financing: The year before issuing these warrants, firms using this form of finance under-performed various market indices by 5 to 11 percent; a year after issuing the warrants, the same firms under-performed the same indices by 40 to 54 percent.
Considering massive naked short sales undertaken either with or without a floating-price convertible warrant, we believe that this type of stock manipulation has occurred in many hundreds and perhaps thousands of cases over the last decade.
Illicit short sales on such a scale or anything approaching it point to grave inadequacies in the current regulatory regime. In principal, it should be simple to identify short selling of the extent required to manipulate a stock's price. The stock exchanges track the short interest in every issue and can easily identify stocks with sufficient short-sale activity to raise questions of manipulation. It also should be simple to prevent the extended use of naked short sales, since an investor's broker-dealer will know of any failure to deliver the shares being shorted, the information systems within investment firms track such failures to deliver, and the NSCC is charged with monitoring the failures to deliver reported by investment firms.
The large-scale naked short-sales now acknowledged by the SEC and confirmed by research require broker dealers willing to look the other way as their customers carry out their short sale strategy, with some of these broker dealers perhaps relying on a customer's convertible warrant to guarantee that the shorts will be closed eventually. The success of these large-scale naked short sale strategies also depends on a persistent failure by the supervisors and employers of these broker dealers to question or investigate massive short sales transacted through their firms and followed, time after time, by the effective destruction of the targeted companies. The strategy's success further depends on NSCC staff willing to overlook thousands of instances in which large numbers of shares are not delivered for an extended period or on their supervisors' ignoring such reports.
Finally, these manipulations can occur only in a lax enforcement environment. The record shows that the SEC has not disciplined a single broker-dealer, a single investment firm, a single staff or official of the NSCC or DTCC in connection with the massive illegal activities which the Commission acknowledges have occurred.
The rules governing short sales must be tightened and, just as important, the new rules must be strictly enforced. I do not believe, however, that the SEC's proposals in their current form will have an appreciable effect deterring these abuses.
The proposed reforms of the "tick test" will do little to curb the serious abuses in short selling. The Commission writes that a strict "tick test" can prevent,
" … short selling at successively lower prices, thus eliminating short selling as a tool for driving the market down" [and prevent] "short sellers from accelerating a declining market by exhausting all remaining bids at one price level, causing successively lower prices to be established by long sellers."6
This analysis gravely underestimates the ability of sophisticated manipulators to drive down a stock price while technically complying with the tick test. A technically-sophisticated short-selling operation, for example, can carry out a trading strategy that creates or includes brief up-ticks of one-penny, as required under the new test. Whether a manipulated stock's pattern of price decline is smooth or punctuated by plateaus and penny increases on the long way down does not alter the manipulation. In addition, the new bid test, like the current one, would apply only to exchange-listed and NASDAQ NMS securities, and not to NASDAQ small cap, Over the Counter Bulletin Board, and Pink Sheet securities-the equities that are most vulnerable to such manipulation.7 Finally, the proposal to reform the tick test addresses the timing of short sales relative to the price set by immediately-previous short or long sales, but not the core issue of naked short sales.
The Commission considers another approach in the proposed Rule 203. The new rule would authorize the NASD to bar a broker-dealer from executing short sales in a particular security for 90 days for either his own account or the account of a customer who had failed to deliver 10,000 or more shares of that security sold short, within two days of its settlement date. In addition, the clearing agency for the failed delivery could deny the customer who had failed to deliver the benefit of mark-to-market on his short sales, which would freeze his collateral.
The 90-day bar in Rule 203, as currently written, will not "protect buyers of securities by substantially curtailing naked short selling" as the Commission hopes, because it would inhibit only those illegal short sellers working with only one broker dealer and working alone. Under the new rule, an investor caught using naked shorts to drive down the price of stock could find another accommodating broker-dealer or an associate could carry on the scheme the original broker dealer. I urge the Commission to revise the proposed rule to ensure its effective application under such circumstances.
The Commission's proposal to authorize the clearing agency for a failed delivery to deny a customer the benefit of marking to market on his short sales has more potential for curbing short-sale abuses, since it could freeze the profits of naked short sellers. By itself, however, the rule is insufficient: Based on the SEC's findings as well as independent research, we cannot assume that broker dealers or clearing agents always will follow the rules when they can profit from bending or breaking them. As the Commission writes regarding market makers,
"… [W]e believe that extended failures to deliver appear characteristic of an investment or trading strategy, rather than being related to market making. We believe it is questionable whether a market maker carrying a short position in a heavily shorted security for an extended period of time is in fact engaged in providing liquidity for customers, or rather is engaged in a speculative trading strategy."
I urge the Commission to improve the proposal by making the sanctions mandatory: In every case of an extended failure to deliver shares, the collateral will be frozen until the shares are delivered. If the shares are not delivered within five business days-almost twice the length of the normal clearance and settlement procedure-the investment firm should be compelled to use the collateral to buy-in the position and liquidate the short sale. Finally, the NSCC should publish the names of individuals who fail to cover substantial short positions in five days, and investment firms should be prohibited from conducting any transactions for 90 days for those individuals or the firms which employ them.
I also urge the Commission to heed the concerns about market makers noted above and develop rigorous criteria for distinguishing genuine markets makers from those claiming the role in order to escape regulation and, among genuine market makers, distinguish clearly those activities which fall under such market making and those which do not. In any case in which short sales are conducted under a cover of genuine market making for which they do not qualify, as in the example noted above by the Commission, the sanctions we propose for everyone else should apply to the so-called market maker.
Even such strict rules cannot guarantee compliance. Current regulations require that any uncovered short be covered within 10 days of settlement; but the NASD, DTCC, NSCC and SEC have failed to penalize their myriad violations. Nor would the new rules affect the abuses associated with death-spiral financing, since that instrument provides a short-selling manipulator with the shares to eventually cover his massive naked shorts. In all these matters, the NASD, DTCC, NSCC and SEC have not shown the commitment required to enforce rules which ultimately guarantee the integrity of the capital markets.
In this context, the Commission's proposal to suspend the tick test for two years for specified liquid securities could send a dangerous message to market participants.8 The tick test, as noted above, is not always effective in preventing short sale abuse; but its suspension in an environment of lax oversight of failures to deliver could substantially increase such abuses. I am particularly concerned with the Commission's comment that the purpose of this pilot program is to "assess whether short sale regulation should be removed, in part or in whole, for actively traded securities."9 I concur that strict regulation of short sales would "especially help smaller issues, whose securities may be more susceptible to the effects of naked short selling … and would promote capital efficiency in smaller, thinly capitalized securities that are more susceptible to manipulation."10 That does not mean, however, that larger issues are always invulnerable. Manipulating their shares would require greater resources and more cooperation from broker dealers and clearinghouse agents, but such efforts could certainly flourish if short sale regulation were removed.
Finally, the Commission has asked for comments on whether the proposed amendments will promote efficiency, competition and capital formation, as required under section 3(f) of Exchange Act. To respond, we must be clear about how short sale abuses impair economic goods. As noted earlier, manipulative short selling, in effect, introduces a form of monopoly pricing that undermines the efficiency of capital markets. The public perception that equity markets are vulnerable to such abuses and that the appropriate agencies are unwilling or unable to crack down, could sharply reduce public confidence in those markets. In turn, declining public confidence can materially damage market efficiency by reducing liquidity in many issues, ultimately reducing capital formation and impairing competition by inhibiting business creation and expansion.
In my judgment, the proposed regulations would not significantly reduce short sale abuses. To have a genuine impact on the efficiency and competitiveness of the equity markets, the regulations should provide much stronger disincentives for naked short sales. The integrity of the capital markets demands much stricter regulation than those currently proposed, much greater industry compliance than has occurred of late, and much tighter enforcement than has been seen thus far.
Robert J. Shapiro
December 24, 2003
Forbes: Naked Short Victim Strikes Back (OSTK)
Financial Services
Naked Short Victim Strikes Back
By This Author
Liz Moyer
Overstock.com filed a $3.5 billion lawsuit in California state court Friday accusing 10 of the largest U.S. securities firms of participating in a "massive, illegal stock market manipulation scheme" to distort its stock.
The Salt Lake City online retailer, whose Chief Executive Patrick Byrne has been crusading against stock market trading abuses not just in Overstock shares but as a broad, pervasive market problem, said the banks' actions caused "dramatic distortions" in how Overstock (nasdaq: OSTK - news - people ) shares were traded and lead to a dramatic decline in its price.
Overstock shares are down 77% in the past two years.
"These manipulative activities have caused tremendous damage to Overstock," Byrne said in a statement Friday. "I believe that this conduct is harming our company and our shareholders deeply."
Overstock's lawsuit says the amount of stock that was improperly shorted has exceeded the company's entire supply of outstanding shares. "It's about rigging the system," says Overstock's attorney, James Christian.
Overstock's suit names Morgan Stanley (nyse: MS - news - people ), Goldman Sachs (nyse: GS - news - people ), Bear Stearns (nyse: BSC - news - people ), Bank of America (nyse: BAC - news - people ), Bank of New York (nyse: BK - news - people ), Citigroup (nyse: C - news - people ), Credit Suisse (nyse: CS - news - people ), Deutsche Bank (nyse: DB - news - people ), Merrill Lynch (nyse: MER - news - people ), and UBS (nyse: UBS - news - people ) as defendants. None of the defendants had any immediate comment on the suit.
Byrne's self-described crusade against trading abuses over the last two years has brought a heap of criticism down on him, but regulators have acknowledged that there are loopholes that make the system ripe for abuse.
Going after the so-called prime brokers, the securities firms that provide stock lending and financing services to hedge funds, is another way to tackle the problem of naked short-selling, a manipulative trading tactic that can drive down share prices artificially and threaten the viability of small publicly traded companies.
Prime brokerage is one of the hottest businesses on Wall Street but little understood outside the world of finance. It essentially is the business of catering to hedge funds, acting as their trading counterparties, financing those trades, and loaning stock and other securities for funds to execute short-selling strategies.
According to Vodia Group, a New York firm that analyzes securities lending portfolios for traders at hedge funds and other asset managers, securities lending rakes in between $8 billion and $10 billion in annual revenues for Wall Street.
In regular short-selling, a trader borrows stock, sells it, and waits (or prays) for the price to drop before buying shares back to repay that loan and pocket the difference. There are rules for assuring that the shares have been properly borrowed, and everyone is supposed to abide them.
In naked short-selling, the trader sells the shares without properly borrowing the stock. When the stock isn't properly borrowed, the buyer at the other end of that short-sale doesn't get delivery of the shares within the mandated three-day window. The buyer also loses out on voting rights and tax-advantages until the short-seller closes out the position.
Now, fast working market makers are allowed to sell without borrowing to keep orderly markets. But naked short-selling as a strategy in and of itself is illegal. It is, however, highly tempting for both prime broker and hedge fund trader.
From the prime broker's perspective, fees can be made by lending out the same sought-after shares to multiple traders at the same time. So prime broker A has 100 shares of Company A and lends 100 shares to trader X, 100 shares to trader Y and 100 shares to trader Z. Obviously 200 of those loaned-out shares don't actually exist, and will result in a trade delivery failure.
From the trader's perspective, a naked short can be less costly, since they have to pay more to borrow hard-to-borrow shares that are usually the choice targets of short-sellers anyway.
Having all those excess shares in the market artificially reduces the price of a stock, Overstock contends in its lawsuit. Overstock has been a regular on a list of Nasdaq-listed stocks that have large and persistent failures-to-deliver since that list started being published in January 2005.
It's tough to say who is more at fault in naked short-selling, the hedge fund executing the short strategy without properly borrowing the shares, or the prime broker for either assisting or turning a blind eye to the practice.
In two suits filed last year in New York federal court, a small hedge fund and a small brokerage accused the same 10 banks named in Friday's Overstock suit of charging them for services they never received. In other words, the prime brokers supposedly took their fees for stock lending services, but never properly lent them shares for their legitimate shorting strategies, unbeknownst to them.
Last summer, 40 investors in the Kansas City real estate investment trust Novastar Financial (nyse: NFI - news - people ) filed suit in California court against the same prime brokers, saying they were responsible for artificially suppressing Novastar stock by skirting stock lending and clearing and settlement rules.
Byrne has spent the last two years pushing legislators, regulators, and anyone else who will listen to reform the system. The Securities and Exchange Commission is combing through comment letters on proposed amendments to short-selling rules that could close some loopholes, but efforts in state legislatures to clamp down on brokerages have largely failed.
Last year, sympathetic lawmakers in Overstock's home state of Utah shoveled a bill through the state legislature and got it signed into law after a special session in May. The new law would have forced brokerages to report trade delivery failures in shares of Utah companies to the state's securities director within 24-hours, or face paying a sort of fine to those issuers.
But the Securities Industry and Financial Markets Association, Wall Street's trade group in Washington, threatened a lawsuit in federal court and got the governor of Utah to capitulate on enforcing the law until June, supposedly to give the SEC time to reform the rules on a national level.
Several other bills in legislatures across the country have been stalled in the last few weeks by a similar threat of litigation by the industry group.
http://www.forbes.com:80/2007/02/02/naked-short-suit-overstock-biz-cx_lm_0202naked.html?partner=link...
Friday May 26, 7:32 pm ET
By Paul Foy, AP Business Writer
Utah Governor Signs Bill That Cracks Down on Naked Short Selling With State Fines for Brokers
SALT LAKE CITY (AP) -- Over the objection of Wall Street firms, Gov. Jon Huntsman signed a bill Friday that cracks down on naked short selling with state fines for brokers who accumulate too many unsettled trades in any company's shares.
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The bill was written for Utah-based Internet retailer Overstock.com Inc., which complains it has been a target of a practice that traders dismiss as a tiny aberration in the markets.
"This bill is good for business, particularly small- and mid-sized cap companies," Huntsman's deputy chief of staff, Mike Mower, said Friday.
Tony Taggart, who handles litigation for the Securities Industry Association, had promised a lawsuit if Huntsman signed the bill, saying of the threat: "It's not a risk -- it will happen."
Taggart said the measure approved by the Utah Legislature late Wednesday caught the industry by surprise. He did not immediately return calls Friday.
"We dropped the ball, all the brokerage firms," said a financial adviser for a major Wall Street firm with operations in Salt Lake City, who insisted on anonymity because he was ordered by the company not to speak about the matter to reporters.
The bill's sponsor, Sen. Curtis Bramble, R-Orem, said Overstock.com was "the poster child" for victims of trading abuse. He said the bill could help other emerging companies that can be vulnerable to short selling.
Short sellers borrow stock hoping the share price declines so they can return it to brokers and pocket the difference. Overstock.com contends it has been a target of naked short selling, where brokers send IOUs they can't honor through a stock clearinghouse when they run out of shares to lend for short selling.
Overstock.com CEO Patrick Byrne says many brokers never settle these trades, allowing short sellers to profit without having to assume risk. The practice tends to lower a company's share price by artificially creating more sellers than buyers.
Bramble said brokerage houses never spoke up against the bill in the months it has been languishing at the Utah Capitol. It finally passed Wednesday during a special session with little debate.
The Utah law requires brokers to regularly disclose trades that fail to settle, adding to paperwork they say is bothersome. Fines for violations start at $10,000 a day and can increase to cover the sum total of all unsettled trades.
Utah Securities Director Wayne Klein said he was prepared to start enforcing the law July 1 and was looking into allegations of abusive short selling.
Klein said his investigation would go beyond Overstock.com's complaints to the lending of shares by brokers without the knowledge of a share's owner, which is allowed under standard customer contracts at brokerage firms.
Klein said it can result in two people voting on proxy proposals or for a company's directors when only one person is the legal share owner. He said some companies adjust for the problem by "prorating" extra votes to shares, but "if that happened in an election for political office, we'd all cry foul."
Shares of Overstock.com rose 65 cents, or 3 percent, to close Friday at $22.66 on the Nasdaq Stock Market.
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