A Short Seller Manipulation Technique Used by OTC Market Makers

http://otcshortreport.com/blog/john-lux/a-short-seller-manipulation-technique-used-by-otc-market-makers/

MASSIVE SYDNEY AND CALIFORNIA TSUNAMIS COMING? - HAARP -

http://www.disclose.tv/news/Massive_Sydney_and_California_Tsunamis_coming/85731

August 7, 2012 -
You might remember the man who apparently predicted the
Japanese earthquake and tsunami:
Mitchell Combes?
Story is that he posted a 104 hour

countdown to the earthquake on his Facebook page and

got it 100% correct.

Different thoughts and ideas circulate as to whether that was a legit prediction or not.

Nonetheless he has just posted his first real prediciton since the Japanese earthquake and tsunami, and if he is correct, we are in for a massive global incident very shortly.

Here is what he posted about 45 minutes ago on his Facebook page (see image above):

"Ok everyone, you've been warned of what's to come, we are getting extremely close to the 104 hour tsunami warning. I strongly advise that if you live on the east coast of NSW and west coast of USA, have your evacuation gear ready to go as soon as possible. I said on March 11 that California would be next after Japan's countdown... Sydney's earthquake will be magnitude 9.5, California's earthquake will be magnitude 9.6, followed by two 9.4's, all of these tsunamis will be created in the same exact hour."

Will he be correct?

When asked how far inland these tsunamis would reach and when exactly he will give his 104 hour countdown he replied, "70 miles inland. Days..."

He is describing an unprecedented event that would pretty much change the face of the planet - if correct, nothing to be taken lightly.

Coombes states he hacks into HAARP and once the HAARP
personnel fire up the array, they cannot simply shut it down.
In other words, once the process has begun, the exercise is a
done deal.
From the moment the array is fired up, says Coombes, there are
approximately 104 hours before the destruction occurs and the
process cannot be aborted.

Coombes maintains that he will ONLY give the 104-hour alert
once the array start-up process has already begun.

Thus, once the countdown announcement has been given, he cannot
recant without being exposed as a fraud.

Make of it what you will, just thought it could be handy to post
in here, just in case.?

What does everyone think? Who knows... are these massive Army moves related:

Read more: http://www.disclose.tv/news/Massive_Sydney_and_California_Tsunamis_coming/85731#ixzz230iCU8Wg
God Bless

Ps.
Please, let the People know so they can prepare etc.
TIA

The US Gold & Silver Mines will be in huge demand again -
US Cities Going Bankrupt In Economic Crisis -

http://stratrisks.com/geostrat/3210

Ex....
Stockton, Calif., Could Become Nation’s Biggest Municipal Bankruptcy -

http://stratrisks.com/geostrat/5120

Stockton California: Real estate seized by Wells Fargo as city preps bankruptcy contingency plan

http://stratrisks.com/geostrat/6295

RON PAUL is the # 1 solution to US economics -
In 1930 the Gold Mines provided the bread &
butter for the People -
history often repeat itself -
ex....
http://www.suttergoldmining.com/s/home.asp

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=76078348

The best places to look for the elusive yellow Au metal
are where it has been found before -
http://investorshub.advfn.com/UNICO-INCORPORATED-%28AZ%29-UNCO-6582/

Ben Swann: Mitt Romney Did Not Win The Nomination

http://libertycrier.com/politics/ben-swann-mitt-romney-did-not-win-the-nomination/

Not bad Bob, Shareholder power!

The Best NEWS in 2012 -
It took long time but better late than never -

UNCO (and ACTC): SEC Charges Penny Stock Financiers and
Two Public Companies With Illegal Unregistered Stock Distributions

http://www.sec.gov/litigation/litreleases/2012/lr22381.htm

U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 22381 / May 30, 2012

Securities and Exchange Commission v.
Mark A. Lefkowitz, Compass Capital Group, Inc.,
Mark A. Lopez, Unico, Inc.,
Steven R. Peacock,
Shane H. Traveller, and Advanced Cell Technology, Inc.,
United States District Court for the Middle District of Florida,
Civil Action No. 8:12-CV-1210T35MAP

SEC Charges Penny Stock Financiers and Two Public Companies With Illegal Unregistered Stock Distributions

The Securities and Exchange Commission filed a civil injunctive action today in
the United States District Court for the Middle District of
Florida against Mark A. Lefkowitz, Compass Capital Group, Inc.,
Mark A. Lopez, Unico, Inc.,
Steven R. Peacock,
Shane H. Traveller, and Advanced Cell Technology, Inc., alleging
that they violated the federal securities laws in connection
with the unregistered distribution of billions of shares of
penny stocks through the repeated misuse of the exemption from
registration contained in Section 3(a)(10) of
the Securities Act of 1933.

Section 3(a)(10) provides an exemption from registration that permits a company to issue common stock to public investors “in exchange for one or more bona fide outstanding securities, claims or property interests” without having to file a registration statement “where the terms and conditions of such issuance and exchange are approved after a hearing upon the fairness of such terms and conditions” by any court or any governmental authority “expressly authorized by law to grant such approval.” The Complaint alleges that the Section 3(a)(10) exemption was not available for any of the stock offerings at issue because the terms and conditions of the exchanges – including the fact that the issuers were raising capital through such exchanges – were not fully disclosed to the court.

According to the Commission’s Complaint, in or about early 2006, Lefkowitz, a penny stock financier, devised a strategy for penny stock issuers to pay off past due debts while, at the same time, improperly raising additional capital in reliance upon Section 3(a)(10). According to the Complaint, Lefkowitz executed his illegal strategy with Lopez, the chief executive officer of Unico, a penny stock issuer based in California, and William Caldwell IV, the chief executive officer of Advanced Cell Technology, a penny stock issuer based in Massachusetts. The Complaint further alleges that Peacock and Traveller, two penny stock financiers who learned of the illegal strategy from Lefkowitz, executed the strategy with Unico and other penny stock issuers.

The Complaint alleges that from September 9, 2006 through January 29, 2009, in order to satisfy the fairness hearing requirement of Section 3(a)(10), more than fifty pre-settled lawsuits were filed in a Florida state court purportedly to settle past due debts owed by Unico, Advanced Cell, or other penny stock issuers (collectively, the “Penny Stock Issuers”) to Compass Capital Group and several offshore financing entities affiliated with Lefkowitz, and Sequoia International, Inc., an entity affiliated with Peacock and Traveller (collectively, the “Financiers”). The Complaint further alleges that in each case, one of the Penny Stock Issuers entered into a written settlement agreement with one or more of the Financiers whereby the Penny Stock Issuer agreed to issue unrestricted common stock to the Financiers at a substantial discount to the prevailing market price, purportedly to retire the past due debt. The settlement shares allegedly were worth multiple times more than the debt that was to be extinguished and the Financiers agreed to remit monies to the Penny Stock Issuer following the sale of the settlement shares to the public on the open market. According to the Complaint, none of the settlement agreements submitted to the court for approval, disclosed, nor did the parties ever apprise the presiding judges of, the existence of the side agreements, that the market value of the shares to be issued greatly exceeded the debts that were to be extinguished, or that significant sums of monies would be remitted to the Penny Stock Issuers as a result of the Section 3(a)(10) settlements.

According to the Complaint, at the conclusion of each of the hearings, the Florida state court granted a Section 3(a)(10) exemption from registration and, thereafter, unrestricted shares were issued to the Financiers, who quickly sold the shares on the open market to public investors unaware of the dilutive effects of the new stock issuances. Also according to the Complaint, the Financiers subsequently remitted millions of dollars to the Penny Stock Issuers, either directly or through an intermediary, as financing, making it an improper capital raising transaction for the Penny Stock Issuers.

The Complaint alleges that Unico extinguished approximately $4.0 million in past due debts but separately raised more than $9.2 million as a result of monies later remitted to it by the Financiers. Advanced Cell allegedly extinguished $1.1 million in debts while separately raising more than $3.5 million through monies later remitted by or on behalf of the Financiers. The Other Penny Stock Issuers allegedly collectively extinguished approximately $1 million in debts while separately raising more than $1.2 million. The Complaint also alleges that Lefkowitz and his affiliated entities profited by at least $1.7 million from these transactions and that Peacock and Traveller profited by at least $455,000.

The Complaint alleges that Unico filed false and misleading disclosures with the Commission concerning the monies it received from the Financiers and that Unico and Advanced Cell failed to timely disclose the settlement agreements and issuance of over 9 billion and 260 million unregistered shares of their respective common stocks in connection with the Section 3(a)(10) settlements. In addition, the complaint further alleges that Peacock, aided and abetted by Traveller, failed to report his beneficial ownership of more than five percent of the outstanding shares of Unico common stock in December 2006.

The Complaint charges all of the defendants with violations of the securities offering registration provisions, Unico and Advanced Cell with periodic reporting violations, Lopez for aiding and abetting Unico’s periodic reporting violations, Peacock with beneficial ownership reporting violations, and Traveller for aiding and abetting Peacock’s ownership reporting violations. The Commission seeks permanent injunctions, disgorgement of illegal profits with prejudgment interest, and civil penalties as to Unico, Advanced Cell, Peacock, and Traveller; a permanent injunction and a civil penalty as to Lopez; disgorgement of illegal profits with prejudgment interest and civil penalties as to Lefkowitz and Compass Capital; and an order barring Lefkowitz, Compass Capital, Lopez, Peacock, and Traveller from participating in any future offerings of penny stock.

Lefkowitz, Compass Capital, and Traveller previously have been enjoined from violating various provisions of the federal securities laws, including the antifraud provisions, in connection with unrelated conduct that also involved the misuse of an exemption from registration of securities offerings. See Litigation Release No. 21319 (Dec. 2, 2009):

http://www.sec.gov/litigation/litreleases/2009/lr21319.htm

and Litigation Release No. 20695 (Aug. 28, 2008).

http://www.sec.gov/litigation/litreleases/2008/lr20695.htm

SEC Complaint in this matter:

http://www.sec.gov/litigation/complaints/2012/comp22381.pdf

Accidentally Released - and Incredibly Embarrassing -
Documents Show How Goldman et al Engaged in
'Naked Short Selling'
POSTED: May 15, 5:39 PM ET

Read more: http://www.rollingstone.com/politics/blogs/taibblog/accidentally-released-and-incredibly-embarrassing-documents-show-how-goldman-et-al-engaged-in-naked-short-selling-20120515#ixzz1vCaHYeT8

Farmboynate' on 'Cobs NSS Solutions -
well, you are on the right track -

Ron Paul to cure America cancer for all PEOPLE ........

Farmboynate thank you, Cobs NSS Solutions -
right on - you are on the right track
a leader with truth and honesty will for
sure turn all around to the better for
the PEOPLE -
Ron Paul has at all time lived up to
the Constitution of USA which gives
the Freedom, Liberty and Rights for
the PEOPLE

welcome to RON PAUL 2012 -
http://investorshub.advfn.com/boards/board.aspx?board_id=9201
dd...Ex. of the B.S.-track record...
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=70774248

welcome to the Long TEAM - Ron Paul -
for a better future help us to save USA -
TIA
God Bless America -
Amen

Just have to say I think we need Ron paul so he can stop all this corruption and ban NSS all together and short selling........... I would reply in the RP Group but don't have a member ship anyway like your post in their on RON paul !

To 'thelimeyone' on 'Cobs NSS Solutions' -

thanks its right - the 666bolshevikz are into
all Gov. positions
incl. ex..
NWO - new world order -
OWG - one world gov. -
mass media -
IMF - etc.
its a elite666pest plaque -

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=32932210

absolute no Liberty or Freedom in America -
before the pest been cleaned out -

God Bless America

Regulators "wilfully ignored the abuses taking place on their beat"


AP
Former SEC chief rips agency on meltdown
Thursday October 16, 3:57 pm ET
By Julie Hirschfeld Davis, Associated Press Writer
Former SEC Chairman Levitt blames agency for failing to avert financial meltdown


WASHINGTON (AP) -- Arthur Levitt, the one-time chairman of the Securities and Exchange Commission, blamed his former agency Thursday for failures he said helped cause the financial meltdown.
A resource-strapped SEC allowed confusion and reckless risk-taking to dominate financial markets, Levitt, who led the agency from 1993 to 2001, told the Senate Banking Committee.

"As the markets grew larger and more complex -- in scope and in products offered -- the commission failed to keep pace. As the markets needed more transparency, the SEC allowed opacity to reign. As an overheated market needed a strong referee to rein in dangerously risky behavior, the commission too often remained on the sidelines," Levitt said.

His testimony came at a hearing on the roots of the economic crisis.

The SEC says the agency's enforcement staff levels are higher now, and the commission has taken many more enforcement actions, than was the case in the 1990s.

An SEC spokesman said he had no direct comment on Levitt's testimony, but noted that as chairman, Levitt hadn't sought the kind of regulations that he's now faulting the SEC for failing to impose.

Indeed, Levitt acknowledged that in 1998, he opposed imposing rules on a type of obscure and extremely complicated financial instrument -- known as credit default swaps -- that are increasingly being blamed for igniting the crisis. He instead called at the time for establishing a clearing facility to keep better track of the swaps, but didn't seek to mandate one.

"I wish that I had probed further. I wish that I had asked for swaps and derivatives to be given the transparency," Levitt said.

In the thick of the meltdown last month, current SEC Chairman Christopher Cox called for the swaps to be regulated as part of a broader financial overhaul Congress plans to tackle next year.

Sen. Chris Dodd, D-Conn., the panel chairman, blamed unscrupulous lending practices for the meltdown, saying the tactics "will be remembered as the financial crime of the century."

He said regulators "willfully ignored the abuses taking place on their beat."

tlo.

The latest dabbling/obfuscation from the SEC

http://www.sec.gov/rules/final.shtml

I love this part,"failure to comply with the close-out requirement of the temporary rule is a violation of the temporary rule". Well whoopee doo doo's, talk about stating the bleedin' obvious, & what's with all the "temporary" nonsense. No doubt about it Cox & his fellow puppet clown Commissioners have got to go. Put AGUIRRE in charge, problem solved. No NSS, no FTD's,prison for manipulators, tranparent markets, confidence restored.

"HE WHO SELLS WHAT ISN'T HIS'N, MUST BUY IT BACK OR GO TO PRIS'N" Daniel Drew.

tlo.

NSS once again the culprit, aided & abetted by the SEC


Monday, October 13, 2008

JETT: Keys to market recovery
Wayne Jett
COMMENTARY:

Amidst the global meltdown in corporate equity share prices, one stock in Europe excels. In fact, it soars. As reported by Bloomberg News on Oct. 7, Volkswagen AG is Europe's largest automaker and best performing stock in 2008, up 190 percent this year. Seemingly a miracle at first glance, VW rose 55 percent Tuesday while market averages globally dropped sharply.

As Bloomberg explains, VW's historic move higher Oct. 7 was fueled by bankruptcy of U. S. investment bank Lehman Brothers. Until its recent bankruptcy, Lehman was a leading prime broker collecting high fees for delivery of borrowed VW shares sold short by Lehman's hedge fund clients.

VW was one of the most shorted stocks in Europe, so the squeeze of short positions is understandable in that context. Yet many other stocks are heavily shorted, too. Why have they not benefited by Lehman's demise as VW apparently has?

Bloomberg's Alexis Xydias explains VW's stock movement as follows:

"Banks that lent Volkswagen's stock to Lehman for use in short sales by their clients probably recalled their loans when the brokerage collapsed on Sept. 15, according to the three people who declined to be identified because the transactions aren't public. In order to keep their client accounts balanced in the meantime, the lenders were likely forced to buy the shares in the open market, the people said."

This explanation must be parsed carefully to understand its implications.

Banks are custodians of many stock portfolios of institutional investors. Under their custodial agreements, the banks may lend shares for use by short-sellers, subject to certain reserved rights. One such right is that the loaned shares may be called back at any time for any reason (upon the owner's sale of the shares, or just because the owner doesn't want to lend them any longer). If the loaned shares are not promptly returned, the bank has the right to buy the shares in the open market and charge the account of the borrower of the shares.

That is what is being reported here. Banks that loaned shares to Lehman and its clients for short-selling are buying in the shares that have not been returned. Lehman and its short-selling clients are being charged for the expense. Short-sellers have not covered their positions, but they are being bought in by banks that loaned them shares to sell short.

To their credit, the lending banks are returning loaned shares to their clients' portfolios. However, the cost of shares may become a claim against Lehman's bankruptcy estate. Whether such claims are adequately secured by collateral is unclear, although banks are reluctant to spend their own funds for such buy-ins.

This is not about just VW, Lehman or bank custodians. This apparently extreme scenario actually depicts conditions affecting markets broadly. Share prices are sharply dislocated from underlying corporate values by trading practices and complex derivative instruments. The dislocation is perpetrated by short-sellers with important assistance from the Securities and Exchange Commission and Wall Street's allied self-regulating-organizations.

Since 2004 and before, the SEC has permitted investment banks and hedge funds to sell short and fail-to-deliver (FTD) the shares to buyers. In 2005, with Regulation SHO, the SEC "grandfathered" all existing FTDs, meaning tens of millions of shares sold short could remain undelivered indefinitely. Regulation SHO itself was riddled with provisions enabling new FTDs to be created. Only last month, effective Sept. 18, the SEC after long delay slightly tightened delivery requirements. But short-sellers and their prime brokers still find plenty of wiggle-room to move FTDs among accounts so as to avoid delivering shares to buyers who have paid for them.

Explaining its dilatory conduct, the SEC considers only the interests of Wall Street's traders - never the interests of millions of investors whose accounts contain only "entitlements" to shares for which they paid in full. A year ago, SEC's director of market regulation, Eric Sirri, conceded to a New York audience that investors would be "surprised" to learn their accounts really do not hold shares.

Severe dislocation of share prices from underlying value of corporations is caused by FTDs that dilute the share float. Extra (counterfeit) shares mean lower share prices, and unreasonably low share prices deprive businesses of new capital without dilution. Allowed to persist, lawless trading conditions destroy companies or drive them from the public markets. The most current consolidated balance sheet released by Securities Industry and Financial Markets Association (SIFMA) shows its member firms were exposed to risks of undelivered shares valued at $258 billion as of March 31, 2008.

This is the cause of destruction in recent months of the private mortgage sector, the investment banking sector and significant firms in the banking sector, not to mention many other companies in all sectors. The SEC must require sold-but-undelivered shares to be delivered without further delay.

By its actions to date, the SEC has chosen short sellers, particularly naked short sellers, to be winners in the markets by permitting extraordinary capabilities to sell shares without delivering them. SEC has justified its actions as necessary to prevent short-sellers here from suffering the fates of those who sold VW short.

By statute, the SEC is supposed to protect interests of average investors. SEC has failed in that duty by permitting hedge funds and others to fail in delivering shares sold short. If U.S. financial markets are to recover, and the credit seizure relieved, the SEC (or Congress) must require all sold but undelivered shares to be delivered without further delay.

Wayne Jett is managing principal of Classical Capital LLC, a registered investment adviser in California.


tlo.

Might as well get rid of all the Commisioners.
Latest comments from them is they are "not very interested" in bringing back the uptick rule, despite every man and his dog telling them otherwise. Close it down, let DOJ take it over and start putting the crims in jail. tlo.

Patrick Byrne to President Bush, Go Patrick!

SALT LAKE CITY, Oct. 10 /PRNewswire-FirstCall/ -- Overstock.com, Inc. (Nasdaq: OSTK) chairman and CEO Patrick M. Byrne sends an open letter to President George W. Bush.

October 10, 2008

Mr. George W. Bush
President of the United States of America
1600 Pennsylvania Avenue
Washington, D.C. 20500

Dear President Bush,

I was pleased to hear you say today that the SEC is taking action to stop manipulative practices in our markets. One such practice that the SEC must stop immediately is the insidious practice of naked short selling. In order for our stock settlement system to work so that trades actually settle, the SEC (or Congress) must take the following steps:

1. Enact a market-wide mandatory pre-borrow requirement for all short
sales;
2. Put in place a market-wide hard-delivery requirement on T+3 for all
sales;
3. Require that for any failure-to-deliver, broker-dealers must force a
mandatory buy-in;
4. Track each trade cradle-to-grave, so that prosecutors can go after
naked short sellers;
5. Require regular and timely disclosure by naked short sellers of when
and how many shares they are failing to deliver; and
6. Enforce these rules, including significant monetary penalties and jail
time.


In addition, I believe that Washington must conduct a 9-11 Commission kind of investigation into our nation's entire clearing and settlement system.

Naked short selling is a significant issue. It has contributed to the recent fall of some of our financial institutions and exacerbated the current market crisis.

A well functioning capital market should settle trades. Only when there are laws in place that ensure settlement of all trades and when those laws are vigorously enforced, will the scourge of manipulative naked short selling stop.

Sincerely,

Patrick M. Byrne, PhD.
Chairman and Chief Executive Officer

cc: Senator Harry Reid, Senate Majority Leader
Senator Christopher J. Dodd, Chairman, Senate Banking, Housing, and
Urban Affairs Committee
Senator Richard Shelby, Ranking Member, Senate Banking, Housing, and
Urban Affairs Committee
Representative Nancy Pelosi, Speaker of the House of Representatives
Representative Barney Frank, Chairman, House Committee on Financial
Services
Representative Spencer Bachus, Ranking Member, House Committee on
Financial Services
Christopher Cox, Chairman, Securities and Exchange Commission
Kathleen L. Casey, Commissioner, Securities and Exchange Commission
Elisse B. Walter, Commissioner, Securities and Exchange Commission
Luis A. Aguilar, Commissioner, Securities and Exchange Commission
Troy A. Paredes, Commissioner, Securities and Exchange Commission
Eric R. Sirri, Director, Division of Trading and Markets, Securities
and Exchange Commission
Henry 'Hank' M. Paulson, Jr., Secretary, Department of Treasury


tlo.

DTCC at the Heart of NSS Crimes

Article from Aaron Morgan Group

http://aaronmorgangroup.typepad.com/aaron_morgan_group_blog/

tlo.

Want to get rid of NSS?.
Get rid of Cox he is the problem, laws have been in place since 1934 they just have not been enforced. Put someone in charge who is not beholden to Wall St & the Hedge Funds, problem solved overnight. No new laws have to be enacted, just get rid of the Cox amendments(loopholes), & enforce the existing laws.
Cox has to go, I vote for Gary Aguirre to replace him. NSS out, short squeeze in. Nobody will be worried about the DOW then, & it will not cost the taxpayer a penny. tlo.

Latest from Mark Mitchell, Deep Capture

http://www.deepcapture.com/the-naked-short-selling-that-toppled-wall-street/

tlo.

Latest from the SEC

http://www.sec.gov/news/press/2008/2008-235.htm

tlo.

Naked Short Selling & Phantom Stock by Criminals in the Financial Markets

http://www.opednews.com/articles/Naked-Short-Selling-and-Ph-by-Allen-Heart-080929-462.html

tlo.

Emails show journalist rigged Wikipedia's Naked Shorts

http://www.theregister.co.uk/2008/10/01/wikipedia_and_naked_shorting/page2.html

tlo.

http://www.marketwatch.com/news/story/bio-commends-sec-efforts-combat/story.aspx?guid=%7B1456A9D0-7B88-43CA-9159-CE1BD01CCF15%7D&dist=hppr

tlo.

Latest from Deep Capture.
WSJ part of the problem.


WSJ Skips Scandal, Fills Page with Fudge
September 29th, 2008 by Mark Mitchell
Well, predictably enough: Arturo is back!

As our regular readers will recall, Arturo Bris, a professor in Switzerland, issued a report last summer claiming that the SEC’s emergency order banning naked short selling of 19 financial stocks had harmed “market efficiency.” He even claimed that the ban had caused the 19 stocks to lose value relative to the rest of the market.

Professor Arturo plainly fudged his numbers. For example, throughout his report, he calculated percent differences using subtraction instead of division — (X-Y) instead of (X-Y)/X.

Really, his errors were that elementary.

I recalculated Professor Arturo’s raw data, using mathematics instead of a magic hat, and it showed quite the opposite of what he had claimed. The emergency order improved the performance of the 19 affected stocks and had no discernible effect on “market efficiency.”

By then, however, it was too late. The financial media and the short seller lobby had glommed on to Professor Arturo’s report as evidence that the emergency order was a grave mistake. Caving into this pressure, the SEC let the order expire without further adieu.

The naked short sellers were given free reign. You know what happened next – and it wasn’t “market efficiency.”

As for those 19 stocks – including Lehman Brothers (vaporized), Goldman Sachs (nearly vaporized); Morgan Stanley (nearly vaporized); Fannie Mae (nationalized); Freddie Mac (nationalized); and Merrill Lynch (cannibalized) – you could say their “performance” wasn’t so hot. On September 18, the SEC freaked out and banned all short-selling in 800-plus stocks.

Banning legitimate short-selling was a bad idea. But soon, this ban will be lifted, and then we’ll be back to square zero – with illegitimate naked short sellers once again threatening to crater the financial system. To prevent this from happening, the media should be clamoring for the SEC to enforce a permanent, market-wide ban on naked short selling – forcing hedge funds to borrow real stock before they sell it.

Instead, The Wall Street Journal has once again trotted out Professor Arturo to regale readers with more of his mutterings about “market efficiency.” In a Journal op-ed today, the Professor makes the same sort of sweeping claims that he made last summer, though this time he has wisely avoided publishing his raw data, so it is hard to know whether he is once again botching the math.

In any case, I will address each of his points.


PROFESSOR ARTURO POINT NO. 1: “Short selling activity was not excessively high for the 799 stocks from January to the ban’s start. While the percentage of short sales to total shares outstanding hit 19.1% in March, that percentage fell to 14.8% in July, when the sector’s stock prices experienced the greatest drops since March 2007. From Sept. 1 to Sept. 12, short sales in the 799 stocks amounted to a low 6% of shares outstanding. Short sales in relation to trading volume display the same pattern.”

So what? The question is not whether short-selling increased or decreased. It is whether specific criminal hedge funds manipulated the prices of specific stocks. Of those 799 stocks, more than 50 appear on the SEC’s “threshold” list of companies experiencing excessive “failures to deliver” – pretty good evidence of illegal manipulative naked short selling.

Meanwhile, it is important to note that many companies that do not appear on the “threshold” list might nonetheless have been victimized by market manipulators The SEC’s data is incomplete and does not register much illegal naked short selling – such as that which takes place “ex-clearing.” Moreover, a company makes the “threshold list” only if excessive “failures to deliver” occur for five consecutive days.

In the cases of many big financial institutions, the data through June shows unbridled naked short selling (with “failures to deliver” often exceeding 1 million shares) in stretches of less than five days. Typically, these stretches are followed by a brief pause (keeping the stock off the threshold list), after which there is another round of unbridled naked short selling.

The SEC has ordered a couple dozen hedge funds to hand over records of their trading in American International Group, Merrill Lynch, Washington Mutual, Goldman Sachs, Lehman Brothers, and Morgan Stanley. It is not difficult to see why the SEC is investigating. Though only Washington Mutual has appeared on the threshold list, the data through June shows that each of these stocks were exposed to repeated stretches of massive “failures to deliver,” often coinciding with the circulation of false rumors. No doubt, the data through September (soon to be made public) will be even uglier.



PROFESSOR ARTURO POINT NO. 2: “Short-selling activity typically picked up after a stock fell in price, not generally before. Increases in short selling of individual stocks more often occurred the day after a sharp price drop, not before. This is consistent with research conducted by Karl Diether and Ingrid Werner of Ohio State University, and Kuan-Hui Lee of Rutgers, showing that short sellers trade in response to past negative news, and that they reveal information about forthcoming price drops. They may also want to protect their long positions from further declines by locking in prices through short sales… A detailed look at the short-selling transactions on Sept. 9, 2008 — the day Lehman Brothers fell 45% — shows that short sales were much more frequent during the second part of the day, after Lehman shares had already fallen 30%.”

Again, so what? I have no doubt that most short-selling occurs after prices start to drop. Most short selling is legitimate. What should concern The Wall Street Journal is the vast amount of illegitimate naked short selling that is occurring just before hedge funds leak distorted information and false rumors to The Wall Street Journal.

For example, one day last June, somebody naked shorted, and ultimately failed to deliver more than 1 million shares of Lehman Brothers – just before the world was treated to the false rumor that Lehman had gone to the Fed for a bailout.


PROFESSOR ARTURO POINT NO. 3: “Prior to the ban’s start, spreads, liquidity and other metrics for the financial services sector roughly matched the entire market’s norms.”

Yes, “prior to the [current] ban’s start” – namely, during the July to August period when the SEC banned naked short selling of 19 financial stocks – spreads, liquidity and other metrics did, indeed, “roughly match the market’s norms.” In other words, banning naked short selling did no harm whatsoever to the markets. Professor Arturo’s raw data showed this, though he suggested to the press that the opposite was true.


PROFESSOR ARTURO POINT NO. 4: “After the [total ban on short selling] took effect last week, we saw a dramatic shift for the worse (market quality and stock liquidity declined) as investors found it increasingly difficult to hedge market risks. Liquidity dried up.”

In August, Professor Arturo similarly claimed that “liquidity” had dried up after the SEC banned naked short selling in 19 financial stocks. However, his raw data showed precisely the opposite.

This time, he provides no raw data, so who knows if liquidity dried up? In any case , the total ban on short-selling will be lifted, so there is little sense in arguing against this policy. The question, again, is whether naked short selling has been used to manipulate stocks, and whether the SEC is going to do anything about it.


PROFESSOR ARTURO POINT NO. 5: Bid-ask spreads increased more for the 799 stocks than for the market overall. Comparing the period Jan. 1, 2008, through the ban’s first week shows that relative spreads (that is, the bid-ask spread relative to the quote mid-point) increased from 3.38% to 5.33%. This increase is not due to the financial crisis itself, as relative spreads have also increased from the beginning of September to the past week (from 3.87% to 5.33%).”

I cannot believe this gobbledygook was allowed to appear in the Wall Street Journal. So, from a randomly selected date in January, through a day one week after the short selling ban took affect, spreads increased. From the beginning of September (whenever that was) to “the past week” (whenever that was) spreads increased by precisely the same amount.

What does this mean? Nothing. The question is whether spreads increased during the period of the ban, which went into affect on September 18 — not “at the beginning of September.”

More importantly, since nobody is suggesting that the total ban on short selling remain in effect, the question is whether spreads increased by some catastrophic amount during the period when the SEC banned naked short selling (temporarily preventing the market from collapsing by a catastrophic amount). In his earlier report, Professor Arturo wrote that “spreads increased” during the ban on naked short selling. However, his raw data showed that spreads on the 19 affected stocks increased by more than any other stocks..


PROFESSOR ARTURO POINT NO. 6: “The intra-day trading range has almost doubled for the 799 stocks over the past week. This means that liquidity deteriorated. Less liquidity makes it more difficult for investors to trade without a severe market impact, and prices are less transparent.”

In his last report, Professor Arturo cited “trading range” as a measure of volatility, not liquidity. As a measure of liquidity, he cited “increased spreads” (which, I have noted, did not, in fact, increase). I suppose it is a matter of convenience for him to now use trading range numbers to support his theory about liquidity (which did not worsen during the more important ban on naked short selling).


PROFESSOR ARTURO POINT NO. 7: “By last Friday, share prices for the 799 stocks did rise 0.11% relative to the market and adjusted for risk. However, such an increase is not statistically significant. The 799 stocks had performed much better in the two previous weeks: Between Sept. 1 and Sept. 19, they outperformed the market on a risk-adjusted basis by 6%. To be sure, one has to believe that much of this movement was attributed to the likelihood of some type of bailout package being passed.”

Financial stocks outperformed the market from Sept 1. to Sept. 19? Tell that to Lehman Brothers, Morgan Stanley, Goldman Sachs, American International Group, Washington Mutual, Merrill Lynch, Bank of America, etc., etc.

Were these stocks manipulated? Why is the Journal not asking that question?


PROFESSOR ARTURO POINT NO. 8: As a result of the ban on short selling, stocks “reacted sluggishly to news. The 799 shares reacted more slowly to news than stocks outside the ban’s umbrella — a key sign of market inefficiency. In an efficient market, individual stocks should be affected primarily by company-specific news rather than overall market activity.”

Professor Arturo made a similar claim about the stocks affected by the July-August ban on naked short selling. His raw data, however, showed precisely the opposite to be the case. During the ban on naked short selling, the affected stocks reacted to news faster than before.

In the absence of any raw data to support this latest claim, I am not inclined to believe it.


PROFESSOR ARTURO POINT NO. 9: In recent weeks, “Investors had difficulty getting pricing for stocks. Trading was down, stock-borrowing costs had soared, and uncertainty hung over the market due to the bailout’s fate and the SEC’s increase of stocks the ban originally covered. The balance of buying and selling that is so critical for markets to function was effectively gone.”

In other words, the market went haywire. That is hardly news. The news (though you don’t read it in The Wall Street Journal) is that this mess could have been prevented if the SEC had expanded its emergency order banning the naked short selling that was quite demonstrably destroying our markets.

Posted in 9) The Deep Capture Campaign |

tlo.

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tlo.

Naked in Wonderland - must read!

Naked in Wonderland

Recent concerns about short-selling have culminated in a regulatory flurry of emergency orders and amended orders. What should be of concern, however, is not short-selling per se: As its devotees frequently remind us, short-selling is a vital and legitimate market activity. What should be of concern are specific types of stock manipulation that cloak themselves within legitimate activities such as shorting, and which, in one way or another, rely upon loopholes in our nation's system of stock settlement.

"Settlement" is the moment in a stock trade when the seller receives money and the buyer receives stock. Our settlement system has huge loopholes that allow sellers to sell shares but fail to deliver them. In such cases, the system creates IOUs for shares, and lets those "stock IOUs" circulate in the expectation the seller will soon correct his error. This is harmless--as long as the IOUs are inadvertent, temporary and few.

Manipulators are exploiting these loopholes, however, selling stock they do not intend to deliver. This is often referred to as "naked short-selling" (short-selling because they feign selling borrowed shares; naked because they don't really borrow shares, but instead deliberately rely on loopholes to generate and hide stock IOUs).

But naked short-selling is just one form this manipulation takes. Other forms include failed long-sales, abuse of the option-market-maker exception, failed offshore deliveries and ex-clearing abuses. The common denominator of these manipulations is that they flood the system with stock IOUs that are deliberate, persistent and massive.

By whatever name, these actions create small, medium and large problems.

The small problem is that stock IOUs corrupt corporate democracy because the system has trouble distinguishing real stock deserving real votes from stock IOUs with fake votes. In 2006, Bloomberg Markets wrote, "A robust market for stock loans puts into circulation billions of borrowed shares that can create multiple votes that corrupt corporate elections."

Bloomberg quoted Registrar & Transfer CEO Thomas Montrone: "It is an abomination. ... A lot of the time, we have no idea who's entitled to vote and who isn't. It's nothing short of criminal." Bloomberg suggested arbitrageurs are exploiting this, and concluded that until it is fixed, "double and triple voting on one share will continue to make a mockery of shareholder democracy."

The medium problem is that manipulators selling millions of stock IOUs drive down share prices: If they choose the right target (e.g., a large financial firm already weakened by exposure to the mortgage crisis, or a small biotech company sipping at capital as it develops drugs), this can crash the firm.

According to former Undersecretary of Commerce for Economics Dr. Robert Shapiro, "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."

His research turned up at least 200 companies that were destroyed, for "a combined market loss of more than $105 billion." Shapiro added, "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."

The large problem is that unsettled stock trades create systemic risk. Imagine that a hedge fund generates IOUs on 5 million shares of a $1 stock and carries this as a $5 million liability. To settle these IOUs, the fund must obtain stock. However, the act of buying 5 million shares of a thinly traded stock forces its price up (i.e., a "squeeze"). The fund must pay more than $1 per share, so the $5 million liability balloons.

The Securities and Exchange Commission has revealed that, during the second quarter of 2008, there were $14.9 billion in stock IOUs at just the tip of the non-settlement iceberg. The commission refuses to reveal (and, in fact, may not know) the size of the whole iceberg. Public data suggests the entire bucket may be over $150 billion; settling it would cost more than $150 billion, but perhaps far, far more.

Our settlement system lies within a black-box called the Depository Trust & Clearance Corporation. The DTCC is essentially unregulated, but is owned by those who benefit from seeing these activities continue--investment banks, which in return for prime brokerage fees, enable manipulative hedge funds.

When these loopholes began to be exposed this winter, Wall Street started to eat its own. In a moment of Shakespearean irony, Bear Stearns--with its legendary willingness to provide cover to manipulative hedge funds--became the target. Stock IOUs in Bear Stearns soared, as they subsequently did in Lehman Brothers (nyse: LEH - news - people ), Merrill Lynch (nyse: MER - news - people ), Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ).

In an absurdity worthy of Lewis Carroll, the SEC promulgated a temporary (and now expired) emergency order against doing to these and 16 other firms what has been illegal for seven decades: selling non-existent stock and deliberately relying upon stock IOUs. That the 19 companies protected included prime brokers widely thought to be enabling naked shorting may fairly be described as "Kafkaesque."

Since its Aug. 12 expiration, four of the 19 firms have been lost. The rest of the financial market balances on a precipice as the SEC temporizes, adopting half-measures with Nerf penalties, draconian measures (such as forbidding all shorting in financial stocks), contradictory measures (re-opening the option-market-maker exception for financial stocks), and "don't ask, don't tell" measures (such as yesterday's, requiring option-market makers not to sell puts to someone they think is increasing a net short position in a financial stock).

While the SEC performs its best headless chicken imitation, we must not be distracted from the fundamental problem: Our system is rife with unsettled trades that are deliberate, persistent and massive.

Commenting on this last year, Warren Buffett's partner, Charles Munger, said, "Those delays in delivering sometimes reflect tremendous slop in the clearance process. It is not good for a civilization to have huge slop. Sort of like how it isn't good to have a lot of slop in nuclear power plants." Charlie Munger is known for many things, but careless word choice is not one of them.

Patrick M. Byrne is the chairman and chief executive officer of Overstock.com and writes for DeepCapture.com.

http://www.forbes.com/opinions/2008/09/23/naked-shorting-trades-oped-cx_pb_0923byrne.html

tlo.