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OSFT bid @ +.01 with no takers!
It's going to pop with the continued volume, the stakes keep getting higher on each round. I'm guessing that news is on the way about Nanergy. The spread on the ask should start to gap, the charts are telling me so! I got this e-mail last night on OSFT, it had NANOTECHNOLOGY written all over it! You have to love it when groups are taking notice, and buying according to the volume.
Good Trading!
fungus, You are like a bad case of jock itch that wont go away.
I'm just venting on the smallest thing I can see, and you happen to be bacteria......LOL!
It is not over until the fat TA sings.
garrett800ca
I am fortunate enough to have a position at .0033 free and clear. I see silver for OSFT imho! I
What's so funny fung_derf?
Greed factor...... you have to be kidding me. So you are insinuating that GVRP was a manipulation scam from the company to trap investors in a F/S that never happens? If that's the case, screw the SEC........ I'll call the mafia and get my justice. And for God sakes NO!, I never put all my eggs in one basket. Keep it up and I'll track you down and put some tough-acting-tinactin on you...... loose the fungus!
If the SEC is watching,
I'm on the record as saying that if business as usual were to continue with the company and I was given my due bills, I would have sold everything and bought OSFT @ .005, look at it now! There has been suffering, and not just by me. Not that I'm out a whole lot of money, its the principle of the matter. I will take my shares in a comperable market condition,
"Trades Stand, Shorts Cover!"
Anything new around here,
Let me guess, still no shares yet...LOL! Not that it is funny or anything!
I have my 55 shares w,due bills from the 20th, that has been settled in my account. You are right, the SEC wont erase these trades. Scottrade says I'm settled from the trades, they did not know if any of the F/S settled prior to the halt.
Posted by: stock_rancher
In reply to: None
Date:5/24/2005 1:34:18 PM
Post #of 58606
UPDATE: Spoke w/Loraine @ Interwest & Company answering machine
I have had trouble getting in touch with Loraine @ Interwest Transfer. I was able to use the company directory to track her on the corp. phone system.... it worked. I asked her about my F/S shares? She said that the GVRP has put a gag order on her preventing her from speaking on any subject that has to do with GVRP and had been ordered by the company to give the company phone number (706)645-9410 to anyone that inquires. I then said that I bought shares after the R/S and prior to the F/S and all I needed to know is if my F/S shares are issued or being issued..... she said, " I have been ordered by the company not to answer any inquiries about GVRP." I said that I will call the company and told her to have a nice day. I then called the company per the number she has been ordered to give out and got the message system. I left the message of my name and phone number where I can be reached and also about the F/S split that I am due. I said that I did not want to join the class action law suit until I knew for a fact that my F/S split were not going to be deposited as it has been reported on various internet chat rooms. I have had no response from them yet. This is my last free post of the day, so if you want any further updates, I'll post them over on RB OSFT Board. I encourage everyone to call the number listed above to find out what is going on before we join the class action. Copy and paste this post as needed.
I'll be back at midnight!
Joe Glavan from SEC 202-551-4572
Thanks, I left a message for him. i talked to the T/A. Interwest told me they were gagged by the company from commenting on my F/S DUE BILLS or anything GVRP.
I bought GVRP for the 3 million F/S and the .0001 minnimum BID Req's., looks like a home run to me. Only problem here is they did not deliver the F/S. If I only had Ameritrade, I could have sold off on the 19.5 Billion share day and mooved the procedes into something else...... for example, OSFT @ .005 and now .01 / you all know the deal.
Art2Gecko, I agree....OSFT
OSFT should be getting a bounce here. I still have a position there for the BIG day...Nanergy.
I just got off the phone with Scottrade,
I had a message that the call would be recorded, lets just say I had an interview.... wouldnt doubt if it was the SEC. The guy acted as if he knew nothing on GVRP, so I filled him in deal. Then he all the sudden knows everything about the company. He said the TA cant even issue shares under this halt. He then said he has never seen anything like this before and that someone will pay for this. I asked what his gut feeling was on the saga. He said that the SEC will come down hard on the company for creating this mess.
There are no more than 1 Trillion Shares to be covered.
The only answer here may be a tender offer. Everyone is happy, well almost everyone. IMO, In the end it will be insurance that pays up.
How does this sound,
All trades will stand & F/S is enforced, tender offer on o/s @ .0002 or higher paid in cash div., the shell and merger is reorganized. I can see it now at Interwest, "That's not how we do it around here". The company, pink sheets, brokerages, MM's, SIPC, DTCC, Insurance........ whoever, picks up te tab.
My account 2 Scottrade: May 31, 2005
GVRP# GLUV 55 CASH N/A 0.01 0.00
#Not available for sale due to a reorg or a tender offer
Reorganization=
Creating a plan to restructure a debtor's business and restore its financial health.
Tender offer=
General offer made publicly and directly to a firm's shareholders to buy their stock at a price well above the current market price.
Tender offer premium=
The premium offered above the current market price in a tender offer.
Not certain if NITE was short.
Under law your brokerage has to tell you who was on the other side if you ask. I know this for certain, I am the holder of record as of may 20th and the shares are in the streets care under good faith. Scottrade is listed as a buyer for me under the capacity of brokerage. Scottrade purchased the shares from NITE. I would like to know if NITE acted in the same capacity for another trader or if they sold them to me naked.
Scottrade knows nothing....
....... and they are going to keep me in the dark until the suspension is lifted. They tell me NITE was on the other side and they have no further comment at this time. The plot thickens!
What split-rate did you get?
TIA
I just spoke to Scottrade,
nothing new on that end, we had a good laugh........ 3 million for 1 F/S, too good to be true with the .0001 bidding req's. If this does pan out with the NASDAQ aka NASD, this will be the trade of the year. I'm glad its back to business as usual, my liver cant take another day...LOL!
Hi, I'm stock_rancher and I'm an alchoholic, it started with this stock called GVRP.
"One trade at a time!"
hlniv,
Scarrrrrrry, you been listening to the old lady....lol!
GT!
12 Posts to roll! "split-crazy"
If I become premium, I had 11 posts to roll. Picture, disclamer......ok!
Jim Bishop, the common man is exempt!
Donr deal, they are looking deep within inside, word is due sales are due or never a relisting.
The SEC will follow rule,
I dare anyone to tell me 55 @ $2.50 with no sell is not bullish! I held the shares and am due bill of sales. I guess that makes me long GVRP, after all, I own 5x the outstanding shares of the company. We are talking a TRO, and kiss mine!
Another 20 pack!
wow, wow!
Goog Trading!
It's going to get real nasty if the trades stand and a cover is passed down as an order in the rulings. The SEC stepped in for good reason........ to fish out the shorts and non-issuance of shares. We may even get a tender offer for our shares. If someone does not issue our shares we will get to file a claim from the DTCC or other body, I only hope they are striking a just deal for us if thats the plan.
Who's Behind Naked Shorting?
By Karl Thiel
March 30, 2005
Last week, when I wrote about naked short sellers and Regulation SHO, I suggested none too subtly that the new rules seem to deal pretty lightly with any bad guys operating outside the law. If the Securities and Exchange Commission is acknowledging a problem, as it seems to be, then Reg SHO seems like a pretty weak tool for controlling it.
But that was last week's subject. Having gotten to that point, I was left wondering how extensive the problem really is. As I said then, I'm deeply skeptical of some conspiracy theories that suggest that short selling is not only rampant, but also a part of a coordinated scheme involving brokers, media, and regulators trying to bring down targeted companies. In fact, let me say at the outset that after spending many hours looking at this issue, I remain unconvinced of the larger conspiracy theories and agnostic on how extensive naked short selling is or how exactly it happens. There is no shortage of theories -- some of which I'll discuss here -- but little in the way of concrete answers. So the first and most obvious question is, how much of this is going on?
Rare or everywhere?
Unfortunately, nobody seems to know. The Depository Trust & Clearing Corporation (DTCC), a holding company that clears and guarantees almost all trades in the U.S., very recently posted an interesting Q&A on naked short selling, an article well worth reading if you're at all interested in the subject. "While naked short selling occurs," says DTCC First Deputy General Counsel Larry Thompson in the document, "the extent to which it occurs is in dispute." Ain't that the truth.
Nevertheless, the DTCC has a good reason to say something public about the issue. The subject of naked short selling has gained some momentum with the introduction of Reg SHO early this year and a rising tide of complaint from companies like Overstock.com (Nasdaq: OSTK) and others. But in addition to this general attention, 12 separate lawsuits have accused the DTCC itself of engineering naked short-selling schemes. Nine of these, according to Thompson, have been dismissed or withdrawn, while three are still pending.
The basic accusation is that the DTCC itself counterfeits shares through its stock borrow program. This program has been around for more than 20 years and helps guarantee transactions when one party fails to produce promised shares. While the DTCC itself doesn't own shares, a network of participating broker-dealers lists shares available for borrowing with the program, and these are called on to complete failed transactions.
Lawsuits have claimed that the DTCC loans out shares it never collects from participants. These, in turn, presumably show up as new "fails to settle" transactions, but from the point of view of the market, they appear to be new shares floating around -- in electronic form, that is, without stock certificates to back them up. These can then be relisted, the theory goes, as available for borrowing, and the process repeats itself, allowing the folks manipulating the system to essentially manufacture any number of phantom shares.
Thompson calls these accusations "either an intentional misrepresentation of the SEC-approved system, or a profoundly ignorant characterization of this component of the process of clearing and settling transactions." I want to stress that I'm not supporting these accusations -- I mention them because they describe one popular theory of how naked short sellers operate.
Something's going on here
But if we rule this out, how does one explain the suspicious volumes and consistent, ongoing settlement failures experienced by companies like BioLase Technology (Nasdaq: BLTI), Netflix, or Rule Breakers pick Taser (Nasdaq: TASR) on the Threshold Security lists? Thompson, while acknowledging that naked shorting does happen, suggests that many settlement failures are innocent. "An investor can get a physical certificate to his broker too late for settlement," he suggests. "An investor might not have signed the certificate, or signed in the wrong place. There may have been human error, in that the wrong stock (or CUSIP) was sold, so the delivery can't be made. Last year, 1.7 million physical certificates were lost," he continues, "and sometimes that isn't discovered until after an investor puts in an order to sell the security. There are literally dozens of reasons for a 'fail to deliver,' and most of them are legal. Reg SHO also allows market makers to legally 'naked short' shares in the course of their market making responsibilities, and those obviously result in fails."
But can unsigned or lost certificates really explain why some companies have lingered on the list for weeks, meaning that more than 10,000 shares per day or over 0.5% of the company's entire float is subject to failed settlement on a daily basis? If that's the root cause, it would certainly seem to point to some pretty shoddy settlement practices among broker-dealers. If that's really all there is to this, then maybe Reg SHO will serve its greatest purpose in embarrassing some brokers into improving their settlement procedures.
Who's making the market?
Yet, as I noted last week, it is the market-making exemption that still seems to me like a source of potential trouble. Market makers don't have to locate shares before executing short sales in most circumstances. Their role is to keep an inventory of readily available stock, to smooth volatility, and to manage their own risk, and this sometimes requires them to short shares. A prime example of why this is sometimes a valuable function and even protects investors can occasionally be seen with companies emerging from bankruptcy.
When US Airways (OTC BB: UAIRQ.OB) was planning to re-emerge from bankruptcy in 2003, for instance, its old common stock, trading on the OTC BB, rallied -- apparently because some investors mistakenly thought the news was somehow good for shareholders in the old common stock. But the plan called for the issuance of new stock, and the old shares were to become worthless. Market makers, by shorting the old common shares, could burst a speculative mini-bubble in the making and stop more ill-informed investors from losing their shirts. (Of course, one wonders why stocks are allowed to trade at all in these situations, but that's another matter). In any case, this is an extreme example of one function legitimate market makers serve by shorting stock and why they are given an exemption to the rules.
The potential problem is that unscrupulous folks could potentially register as market makers to take advantage of the exemptions. (Do you want to be a market maker? Go here for an application! It's not a rubber-stamp process, but it's not as hard as you might think.) Right now, "bona fide" market making is judged by the individual transaction rather than by the individual market maker, so no market maker gets a blanket exemption, but any market maker -- even the ones posting $0.001 bid/$10,000 ask spreads -- get a pass in the right circumstances. It's a situation that seems to hold potential for mischief.
Overseas intrigue?
And here is a final source of potential trouble I'll suggest. Say the broker placing the order to short a stock is in an offshore location where naked short selling is legal. This would seem to open up the same opportunities purportedly exploited to naked short the stock of companies that have issued floorless convertible debt.
A floorless convertible bond (a vehicle of what is sometimes called the "convertible death spiral") is a debt instrument issued by desperate or dishonest companies to raise cash; the bondholder can convert the debt into stock at variable, below-market prices.
It's not a deal a responsible company should enter into. When a company does a floorless convertible, its stock, not surprisingly, drops. The new bondholders have every reason to short the stock unmercifully, and as the price drops further, they get more shares upon conversion because the conversion rate changes. Thus, the original shareholders lose virtually all their stake in the company. Meanwhile, the bondholders simply short all the shares they can, take their profit, and then hope the stock price continues to drop until they get more than enough shares upon conversion to cover the original short.
As long as the bondholders are using legitimately borrowed shares and not engaging in unscrupulous tactics to manipulate share price lower, this is a legal strategy -- although it is hard to see why such floorless converts, devastating for existing shareholders, are in fact legal. But if the bondholders are in an offshore location where they can legally naked short, they might theoretically short more shares than they can get their hands on. After all, the shares they have coming back to them are multiplying as the price drops, so why not?
At the root of the conspiracy theory?
There are folks out there who believe this is the main source of naked short selling in the market. Certainly, in this scenario the bondholder has an incentive to naked short the stock, and one could expect to see massive issuance of new shares as the debt is converted to stock at a rock-bottom price. Failed settlement and suspicious volume in one neat package, right?
Maybe. But since most of the companies on the Threshold Security List haven't issued toxic convertibles, of what relevance is this? Only this: If an offshore concern can naked short the shares of a company to which they've issued a convertible loan, why can't a foreign broker naked short a company for which there is simply high demand for borrowed shares?
When I look at the Threshold Security List, even ignoring the penny stocks, I see companies that a lot of investors want to short (OK, that's pretty much true by definition). The very appearance of these companies means that not everyone is getting to borrow the shares they want -- you won't see Microsoft (Nasdaq: MSFT) or General Electric (NYSE: GE) on the list. Couldn't an enterprising broker in some foreign location be executing naked short sales to satisfy some of this demand? Wouldn't this cause persistent settlement failure?
I have no way of proving this -- it is just surmise. But notice that this scenario does not suggest that the naked shorts are successfully pushing down the price of the threshold stocks to any significant degree. It only suggests that the real demand for shares to short is being satisfied by extra-legal means -- brokers who have set up shop to transact shares of a popular short target. Investors who see value and want to take a long position in these same stocks should naturally balance out the shorts, absent some highly organized conspiracy to spook the market. Thus, I don't think investors in threshold companies should necessarily believe that their stock is artificially depressed to any substantial degree.
More unanswered questions
This may only go part of the way toward explaining unusual volume, however. Last week, I mentioned Global Links (OTC BB: GLKCE.OB), a penny stock that has a listed float of a little over 1 million shares but traded many times that volume in a single day despite there being one shareholder who claimed to own the entire float. I mentioned that particular company because it came up by name at the March 9 Senate Banking Committee hearing, and the story makes a good illustration of the kinds of absurdities showing up on the Threshold Security List.
But in fairness, I should point out that in this particular case, there are other factors that might explain the volume. Among other things, the company has a huge overhang of preferred shares convertible to common stock. It's impossible to tell from the SEC filings alone exactly what's going on here, and while it's an interesting story, a smoking gun it ain't. This is part of what makes penny stocks really bad investment ideas for nearly everyone.
But while Global Links is a strange and perhaps poor example of suspicious trading volume, there are other examples out there. Overstock CEO Patrick Byrne has noted seeing four or five times his company's float trade hands in a day. The same thing has happened to other threshold companies. What explains this?
I'm afraid I still don't know. Is it day traders on steroids, frantically trading back and forth? Perhaps. Could it be a few hedge funds painting the tape, hoping to make it look like the sky is falling? Maybe. Could it be huge numbers of phantom shares out there, making the reported float inaccurate? I guess it's possible.
Unfortunately, Reg SHO appears to raise more questions than it answers. As the DTCC is quick to point out, its job is simply to report the failed settlements. It is up to the SEC to actually do something about it.
By the way, I'll look at some more of the specifics of naked shorting and what they mean to investors in the next issue of the Rule Breakers newsletter.
Karl Thiel is a member of the Rule Breakers newsletter team. Click here for a free trial. He does not own stock in any companies mentioned in this article. The Motley Fool has a disclosure policy.
The Naked Truth on Illegal Shorting
By Karl Thiel
March 24, 2005
It's amazing how the word "naked" can liven up a discussion. Take naked short selling, for instance. The addition of this saucy little word turns the mundane act of borrowing and selling shares of stock in hopes of buying them back later at a lower price into a raging controversy fraught with conspiracy, secret identities, public recriminations, foreign intrigue, sports team owners, and now some of the top regulators in the land.
How can one word cause so much trouble? While legal short sellers must borrow the shares they sell, naked short sellers sell shares of stock they haven't borrowed, have no intention of borrowing, and that may not even exist. Not surprisingly, this activity is illegal and has been since the Securities and Exchange Act of 1934. But for a number of reasons, regulators have overlooked it in the past.
In response to a rising tide of complaints, however, the SEC recently introduced Regulation SHO, which went into effect Jan. 3. The idea was to put a stop to, or at least help control, abusive short selling practices. Unfortunately, the result of the SEC's effort so far has arguably been to turn rampant abuse into a spectator sport by simply providing a list of stocks being most abused? and doing little else.
Intrigue in the sock drawer
How bad is the problem? Listen to this story: On Feb. 3, a man named Robert Simpson filed a Schedule 13-D with the SEC describing his purchase of 1,158,209 shares of Global Links Corp. (OTCBB: GLKCE), "constituting 100 percent of the issued and outstanding common stock of the Issuer." As described in a story that ran on FinancialWire on March 4, Simpson stuck every single share of the company in his sock drawer -- and then watched as 60 million shares traded hands over the next two days.
In other words, every single outstanding share of the company somehow changed hands nearly 60 times in the course of two days, despite the fact that the company's entire float was located in Simpson's sock drawer. In fact, even as recently as last Friday, 930,872 shares of Global Links still traded hands. If Simpson's claim that he owns all shares is accurate, that is a staggering number of phantom shares being traded around by naked short sellers.
What we have here is a failure to settle
This is just one extreme example of a phenomenon a number of companies have complained about. Patrick Byrne, CEO of Rule Breakers recommendation Overstock.com (Nasdaq: OSTK) , for instance, has noted seeing four and five times his company's float rack up in trading volume over the course of a day. Overstock has been on the Nasdaq Threshold Security List for weeks, indicating a consistent pattern of, um, settlement failure.
What exactly are settlement failures? In a legitimate short sale, shares must be delivered within three days of the transaction. If they are not, this is called (excuse the tortured syntax) "fails to deliver." Failure to deliver -- that is, a settlement failure -- could be the result of a bureaucratic snafu or clerical oversight. But consistent failure in large volume would seem to indicate something more nefarious, or at the very least, a major bureaucratic breakdown in desperate need of repair. Failures on the scale experienced by some companies go beyond any innocent explanation.
The Threshold Security List, published daily by Nasdaq, the NYSE, AMEX, and Archipelago (AMEX: AX) , is the most visible aspect of Reg SHO. To make the list, more than 10,000 shares in a company or more than 0.5% of a company's total outstanding shares must fail delivery for five consecutive days. When a stock appears on this list, it is like a red flag waving, stating "something is wrong here!" When a hedge fund is actively shorting a number of stocks that just happen to be on the Threshold Security List, it would seem to be good cause for an investigation. To the extent that Reg SHO brings these issues to the attention of companies, investors, and regulators, it's doing a good thing.
Making the list
But many companies linger on the Threshold Security List, experiencing impossible trading volumes. Many are penny stocks like Global Links, but others include well-known names like Krispy Kreme Doughnuts (NYSE: KKD), Martha Stewart Living Omnimedia (NYSE: MSO), and Delta Airlines (NYSE: DAL) . The issue has finally caught the attention of some members of Congress. At a March 9 hearing of the Senate Banking Committee, Sen. Robert Bennett (R-UT) brought up the subject of Reg SHO's shortcomings with SEC Chairman William Donaldson.
"Nearly as I can tell from my constituents who feel victimized by this," said Bennett, "it's not working." Summarizing how abusive practices might continue under Reg SHO, Bennett said: "I'm told that the way it works is that one brokerage house sells short, has 13 days under your rule under which to acquire the shares, and in that 13-day period hands the whole transaction off to another brokerage house. They just keep moving it around and nobody ever has to settle."
I really wish I could have heard how Donaldson would have replied. He began a recitation of the elements of Reg SHO before Bennett quickly cut him off. In a hurry to get to a vote, Bennett moved on to a new subject and Donaldson never really got a chance to comment. Pity.
One of Bennett's constituents is, probably not coincidentally, Patrick Byrne, whose company is headquartered in Salt Lake City. Naked shorting has become something of a cause celebre for Byrne over the past few months, not least because his company has apparently been subject to extreme levels of it. Byrne became interested in the subject after the company's now-famous fourth-quarter earnings conference call, when a man calling himself "Bob O'Brien" (he won't reveal his true identity for fear that angry hedge fund operatives will do him harm) described a pattern of manipulation of Overstock stock by naked shorts, and predicted the company would show up on the Threshold Security list. It did, the next day.
Cat and mouse
All of this raises an important question: If Reg SHO can pinpoint companies being manipulated, what can it do to stop the abuse? What are the teeth behind the regulation?
Glad you asked. Under the new rules, if shares haven't been delivered for 13 days after the transaction, the broker must buy them back -- with money it presumably would collect from the client who shorted the stock in the first place. So a bad actor can break the law a little bit, but if he breaks it a lot, he has to cover the short -- which he was going to have to do anyway and, since he's been manipulating the price by illegal activity, can probably be done at a bargain price. Now that's showing the bad guys! Moreover, as Sen. Bennett noted, brokers working together could get around even this restriction by passing the transaction among each other, starting the 13-day clock over again.
While Reg SHO stipulates that a broker is supposed to locate shares prior to executing a short sale, there are certain exceptions to this rule. One is that if a stock appears on an "Easy to Borrow" list, this is considered "reasonable grounds" to assume the stock can be located for settlement, and the short sale may proceed without the broker contacting the source of the shares or specifically locating them. (A footnote in the SEC's discussion of the final rule [release number 34-50103] adds: "Of course, securities that are 'threshold securities' pursuant to Rule 203(c) should generally not be included on 'Easy to Borrow' lists." Geez, really? But sometimes it's OK for heavily manipulated stocks to be shorted further without locating shares?)
Another exemption is for "Bona-fide market making." Is it just me, or does the specification that bona fide market making is exempt -- versus sorta market making? --point to some possible wiggle room in interpretation? The SEC is quick to explain that, among other qualifications, "Bona-fide market making does not include transactions whereby a market maker enters into an arrangement with another broker-dealer or customer in an attempt to use the market maker's exception for the purpose of avoiding compliance with Rule 203(b)(1) by the other broker-dealer or customer." Thank goodness deliberately circumventing the rules is forbidden by the rules! That's kind of a tiny echo of Reg SHO itself, which is a set of rules about not breaking 71-year-old laws. I think history has shown us that the rules aren't terribly effective without enforcement.
Opportunity in slop
But in fairness, there is a reason why securities regulations around short selling have been, and continue to be, rather lax and loosely enforced. Remember that the stock market is an old and still largely paper-based system. While naked shorting has been technically illegal for a long time, that doesn't mean that brokers have always been expected to have borrowed shares in hand before executing a short sale. The Securities and Exchange Act of 1934 stipulates a settlement period up to three business days -- meaning in essence that any short can be a naked short for up to three days without a broker being expected to do anything about it. Getting high volumes of transactions completed has always meant acting first and settling later, and a certain amount of slop in the process has always been tolerated.
And where there is slop, there is opportunity. Brokers make money lending out shares, and any stock you own is subject to being lent unless it is held in an IRA or cash account. In fact, the commission brokers make on loaning out shares changes depending on how high the demand is for a certain stock. So when a stock goes into naked short territory, where there is potentially more demand than there are shares in existence, brokers stand to make a lot of money by executing short sales? even if they can't get their hands on the borrowed shares right away. It's one of those gray areas that doesn't necessarily indicate intentional wrongdoing on the part of brokers (at least on a small scale), but that arguably has come to be viewed with an increasing nudge and wink over the years.
Now enter the wackier part of this enterprise. If the borrowed shares are coming from overseas, that's a pretty good excuse for them to take more than three days to show up, right? Turns out a number of companies have suddenly found themselves listed on foreign exchanges without their knowledge. O'Brien raised this scam tactic in Overstock's fourth quarter 2004 conference call, but there is more to this than the opinion of one anonymous conspiracy theorist. A couple years ago, there were a number of biotech companies in just this situation, finding that their companies had been given German exchange listings without any request from management. And I'm sure that by the time I heard about this, the strategy had been around for a long while.
Parting thoughts
Believe it or not, there are actually defenders of naked shorting. By going beyond the normal system of supply and demand, the argument goes, naked shorting acts as a sort of pressure valve to price in negative sentiment on a company when the regular channels are too inefficient.
Thus, the usually upstanding website Investopedia actually offers this defense of naked shorting:
Critics of the new rule argue that if naked-shorting had not taken place during the micro-cap crime wave of the 1990s, such stocks would have climbed even higher before they crashed. Thus, the SEC's action to ban naked-shorting eliminated the only market force against over-hyped, or even fraudulent, small-cap and micro-cap stocks.
That's quite an argument. No one would dare suggest that the government should directly intervene to control the price of securities, but why not let prices be distorted by profit-seekers circumventing the law? Viva la Kleptocracy!
Can naked shorting really be so widespread? I don't like conspiracy theories, and there are some pretty good arguments as to why this problem would be a lot more apparent to rank-and-file investors if it were really so rampant. I'll discuss that in part 2 of this column next week. Plus, I'll look at some more of the specifics of naked shorting and what they mean to investors in the next issue of the Rule Breakers newsletter.
Karl Thiel, a member of the Rule Breakers team, does not own any stocks, long or short, mentioned in this article. He wonders if it is legal to sell his neighbors' power tools as long as he's borrowed them first.
Naked Short Selling and the Stock Borrow Program
In recent months, there has been a fair amount of media coverage of naked short selling, Regulation SHO and even DTCC?s role in that via the Stock Borrow program operated by DTCC subsidiary National Securities Clearing Corporation (NSCC). Because there has been much confusion about these issues, and much misinformation, @dtcc sat down with DTCC First Deputy General Counsel Larry Thompson to discuss these issues.
@dtcc: Let?s start with the question, what is naked short selling and why has it suddenly become an issue?
Thompson: Short selling is a trading strategy where a broker/dealer or investor believes that a stock is overvalued and is likely to decline. It is an integral part of the way our capital market system works. Basically, it involves borrowing stock that you don?t own and selling it on the open market. You then buy it back at a later date, hopefully at a lower price, and as a result, making a profit.
Naked short selling is selling stock you don?t own, but not borrowing it and making no attempt to do so. While naked short selling occurs, the extent to which it occurs is in dispute.
@dtcc: DTCC and some of its subsidiaries have been sued over naked shorting. What has been the result of those cases?
Thompson: We?ve had 12 cases to date filed against DTCC or one of our subsidiaries over the naked shorting issue. Nine of the cases have been dismissed by the judge without a trial, or withdrawn by the plaintiff. The other three are pending, and we have moved to dismiss all those cases as well. While the lawyers in these cases have presented their theory of how they think the system works, the fact is that their theories are not an accurate reflection of how the capital market system actually works.
@dtcc: One of the allegations made in some of the lawsuits is that the Stock Borrow program counterfeits shares, creating many more shares than actually exist. True?
Thompson: Absolutely false. Under the Stock Borrow program, NSCC only borrows shares from a lending member if the member actually has the shares on deposit in its account at the DTC and voluntarily offers them to NSCC. If the member doesn?t have the shares, it can?t lend them.
Once a loan is made, the lent shares are deducted from the lender?s DTC account and credited to the DTC account of the member to whom the shares are delivered. Only one NSCC member can have the shares credited to its DTC account at any one time.
The assertion that the same shares are lent over and over again with each new recipient acquiring ownership of the same shares is either an intentional misrepresentation of the SEC-approved system, or a profoundly ignorant characterization of this component of the process of clearing and settling transactions.
@dtcc: Another allegation is that the Stock Borrow program has become ?a reliable source of income? for NSCC? Some articles have said we make almost $1 billion from it.
Thompson: This statement is purposely misleading. One billion dollars represents our total revenue from all our operations of all subsidiaries. The fact is that there are NO separate fees for transactions processed through the Stock Borrow program. There is just the normal fee for delivery of the shares, which is 30 cents per delivery. If you assume we make an average of 22,000 deliveries through Stock Borrow a day, there would be about $6,600 extra a day in revenue over 253 trading days, or about $1.67 million a year in additional revenue, out of $1 billion.
All of our members know that DTCC and all its subsidiaries operate on a ?not for profit? basis. What that means is that we aim to price our services so that our revenues cover our expenses.
@dtcc: Just how big is the fail to delivers, and how much of those fails does the Stock Borrow program address?
Thompson: Currently, fails to deliver are running about 24,000 transactions daily, and that includes both new and aged fails, out of an average of 23 million new transactions processed daily by NSCC, or about one-tenth of one percent. In dollar terms, fails to deliver and receive amount to about $6 billion daily, again including both new fails and aged fails, out of just under $400 billion in trades processed daily by NSCC, or about 1.5% of the dollar volume. The Stock Borrow program is able to resolve about $1.1 billion of the ?fails to receive,? or about 20% of the total fail obligation.
The Stock Borrow program was created in 1981 with the approval of the SEC to help reduce potential problems caused by fails, by enabling NSCC to make deliveries of shares to brokers who bought them when there is a ?fail to deliver? by the delivering broker. However, it doesn?t in any way relieve the broker who fails to deliver from that obligation. Even if a ?fail to receive? is handled by Stock Borrow, the ?fail to deliver? continues to exist, and is counted as part of the total ?fails to deliver.? If the total fails to deliver for that issue exceeds 10,000 shares, it gets reported to the markets and the SEC.
@dtcc: If the volume in the Stock Borrow program is so small, why are these companies suggesting it is a major issue?
Thompson: Frankly, we believe that the allegations are attempting to purposely mislead those who are not familiar with this program. A number of small OTCBB and so-called ?pink sheet? companies have contended that this practice is driving down the price of their shares and driving them out of business.
According to their own 10K and 10Q reports financial auditor?s disclosure statements, many of these firms have admitted that ?factors raise substantial doubt about the company?s ability to continue as a going concern.? They have had little or no revenue, according to their financial reports, and substantial losses, for periods of seven or eight years. One of these companies has been cited for failing to file financial statements since 2001. Another has been cited by the SEC for press releases that misled investors on expanding business contracts that didn?t exist. They will do anything they can do that takes people?s attention off that kind of record, especially if they can convince a law firm to take the case on a contingency basis, which is what has happened.
@dtcc: Who are the law firms bringing these suits?
Thompson: The main law firms engaged in these lawsuits, and they have been behind virtually all of them, were principally involved with the tobacco class action lawsuit. They like to bring suits in multiple jurisdictions in an attempt to find any jurisdiction where they might be successful in winning large judgments.
@dtcc: What causes a fail to deliver in a trade? Is it all naked short selling?
Thompson: There can be any number of reasons for a ?fail to deliver,? many of them the result of investor actions. An investor can get a physical certificate to his broker too late for settlement. An investor might not have signed the certificate, or signed in the wrong place. There may have been human error, in that the wrong stock (or CUSIP) was sold, so the delivery can?t be made. Last year, 1.7 million physical certificates were lost, and sometimes that isn?t discovered until after an investor puts in an order to sell the security. There are literally dozens of reasons for a ?fail to deliver,? and most of them are legal. Reg SHO also allows market makers to legally ?naked short? shares in the course of their market making responsibilities, and those obviously result in fails. We can?t do anything about them but what we are doing: that is, report all fails of more than 10,000 shares in any issue to the marketplaces and the SEC for their action.
@dtcc: What happens then?
Thompson: The markets check to see if the amount of fails to deliver is more than 1/2 of 1% of the total outstanding shares in that security. If it is, then it goes on a ?Threshold List.? If it is then on the Threshold List for 13 consecutive settlement days, restrictions on short selling then apply. The ?close-out? requirement forces a participant of a registered clearing agency to close out any ?fail to deliver? position in a threshold security that has remained for 13 consecutive settlement days by purchasing securities of like kind and quantity. If the participant does not take action to close out the open fail to deliver position, the participant is prohibited from making further short sales in that security without first borrowing or arranging to borrow the security. Even market makers are not exempt from this requirement.
@dtcc: So Reg SHO doesn?t force them to close out the position, but if they don?t, they are prohibited from making any additional short sales without borrowing the shares first?
Thompson: That?s right.
@dtcc: Does DTCC have a regulatory role in naked short selling? What authority does it have to force companies to settle a fail?
Thompson: Naked short selling, or short selling, is a trading activity. We don?t have any power or legal authority to regulate or stop short selling, naked or otherwise. We also have no power to force member firms to close out or resolve fails to deliver. That power is reserved for the SEC and the markets, be it the NYSE, Nasdaq, Amex, or any of the other markets. The fact is, we don?t even see whether a sale is short or not. That?s something only the markets see. NSCC just gets ?buys? and ?sells,? and it?s our job to try and clear and settle those trades.
@dtcc: Why won?t you reveal the number of fails to deliver in each position to the issuer of the security?
Thompson: There are a couple of reasons. First, we provide that information to regulators and the SROs so they can investigate fails and determine whether there are violations of law going on. Releasing that information might jeopardize those investigations, and we feel they are the appropriate organizations to get that information since they can act on it. Second, NSCC rules prohibit release of trading data, or any reports based on the trading data, to anyone other than participant firms, regulators, or self-regulatory bodies such as the NYSE or Nasdaq. We do that for the obvious reason that the trading data we receive could be used to manipulate the market, as well as reveal trading patterns of individual firms.
@dtcc: How does DTCC respond to claims that shares from cash accounts and/or retirement accounts and/or institutional accounts are being put into the lending pool of the Stock Borrow program?
Thompson: It is our broker and bank members who control their DTC accounts. They can and do segregate shares that they are not permitted to lend out. Neither NSCC nor DTC monitor or regulate that activity. It is done by the SROs and the SEC. However, there is no requirement that brokers or banks participate in the Stock Borrow program, and neither DTC nor NSCC can take shares from an account unless those shares are voluntarily offered by the broker or bank member.
@dtcc: Do you think there is illegal naked shorting going on?
Thompson: Certainly there have been cases in the past where it has, and those cases have been prosecuted by the SEC and other appropriate enforcement agencies. I suppose there will be cases where someone else will try to break the law in the future. But I also don?t believe that there is the huge, systemic, illegal naked shorting that some have charged is going on. To say that there are trillions of dollars involved in this is ridiculous. The fact is that fails, as a percentage of total trading, hasn?t changed in the last 10 years.
FORTUNE, May 30, 2005, "Don't blame shorts"
True, short-sellers profit when stocks fall. But it'd be worse without them.
By Herb Greenberg, FORTUNE
October 15, 2001
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In the days following the World Trade Center attack there was talk on the Street that perhaps short-selling should be banned. The worry was that shorting--a bet that stocks will fall--would exacerbate the expected slide in stocks when trading resumed. The cloud over the practice grew darker amid rumors that alleged terrorist Osama bin Laden had profited from shorting the shares of airline and reinsurance companies. At one point, CNBC's Ron Insana asked Art Cashin, UBS Paine Webber's chief floor trader on the New York Stock Exchange, whether short-selling should be prohibited. Cashin sidestepped the question, and probably for good reason: It shouldn't be. And what happened on the first day of post-Sept. 11 trading shows why.
As convoluted as it may sound (and short-selling is always convoluted), short-sellers may have actually been among the most committed buyers--that's right, buyers!--the day the Dow fell 684 points. To understand how that could be possible, consider how shorting works. It involves borrowing shares and then selling them with the hope of buying them back at a lower price at some point in the future. The stock goes down; the short makes money. But in the U.S., by law, such a short sale can only occur on an "uptick"--when a stock's price rises. That Monday, shares were falling so far and so fast that not only were the shorts incapable of shorting, but several short-sellers say that their firms were actually net buyers, snapping up stocks to cover outstanding short positions. "That clearly produced buying power in the marketplace and helped somewhat to reduce the decline," says veteran short Paul McEntire, chairman of Skye Investment Advisors in Los Gatos, Calif. In other words, as bad as it was, it would have been worse were it not for the shorts.
Of course, vilifying shorts is nothing new. In the early 1600s, investors worked themselves into a speculative frenzy over New World trading outfits like the Dutch East India Co., then blamed short-sellers when the bubble burst and the shares sank. (Sound familiar?) Kathryn Staley, author of The Art of Shortselling, points out that shorting was subsequently banned in Amsterdam in 1610, and then again in Great Britain during the South Sea Bubble in 1720, in France at the beginning of the revolution, and in the U.S. during the War of 1812. All of those bans were eventually repealed.
Still, the shorts were in a tough spot on Sept. 17. Buying stocks, it was said, was a patriotic duty, a way for the average U.S. investor to combat the intended effect of the terrorist attacks by supporting the market and getting the wheels of capitalism spinning again. By that logic, shorting a stock and profiting from a drop in the market would be the financial equivalent of blasphemy. One large short-seller told me he was torn between this apparent duty to his country (to go long) and his duty to his investors (to go short). So he did what any good American would do: He consulted his lawyer. "My attorney told me I have a fiduciary duty to short," he says. Financier George Soros echoed those sentiments in a recent interview with Reuters. "I'm at a loss to understand what is unpatriotic about [shorting]," he said. "It probably helps the market to reach whatever level it is going to go to."
One reason for this is that shorts help provide liquidity. Shorts often sell when everybody else is buying, and conversely (as we saw on Sept. 17), they often buy when everybody else sells. That creates a cushion of sorts when stocks are in free fall. "The overall impact on the market is zero," McEntire says. "While shorts can exert downward pressure when they sell, they can create upward pressure when they buy back." Individual investors benefit because the shorts, McEntire says, "repress the prices of overvalued stocks--stocks that if the public bought would be bad buys."
That's the second important function shorts play. I confess to having a soft spot in my heart for the shorts because they're among my best sources, as they are for many journalists and even regulators. (You think I stumbled on trouble at the likes of AremisSoft, Sunbeam, Lernout & Hauspie, and Boston Chicken by reading through a random stack of SEC filings?) The finest shorts are part private detective, part forensic accountant. They play a critical role in ferreting out fraud, debunking hype, and spotting businesses that are about to turn bad. As I wrote in this space three years ago (see Short-Sellers: The Market's Real Heroes), on Wall Street it's the shorts who really wear the white hats. Get rid of them and you'll see what I mean.
One final note: In the past few months it has been as easy to make money shorting stocks as it used to be going long on random technology plays. Lest you be tempted to start shorting on your own, think first about how some of those long positions have turned out recently. And then remember the difference between the two approaches: When you go long, you stand to lose up to 100% of your investment. When you go short, there's no limit to how high a stock can go, which also means, alas, that there's no limit to how much you can lose. So while I wouldn't recommend doing what they do, I certainly encourage investors to let shorts do what they do without condemnation. They help keep the markets clean--and that's about as patriotic as you can get.
Mom Indicted for Hiring Stripper for Teen
NASHVILLE, Tenn. (AP) - A mother faces criminal charges after she hired a stripper to dance at her 16-year-old son's birthday party. Anette Pharris, 34, has been indicted by a grand jury on charges of contributing to the delinquency of a minor and involving a minor in obscene acts. The boy's father, the stripper and two others also face charges.
``I tried to do something special for my son,'' Pharris said. ``It didn't harm him.''
About 10 people under the age of 18 were at the birthday party in September, including minors who were not related to the family, authorities said.
Police spokesman Don Aaron said minors are not permitted in adult establishments.
``A person shouldn't be allowed to circumvent that law by hiring a stripper, a lady who took all her clothes off and spent a good amount of time dancing around minors,'' he said.
Anette Pharris took photos at the party and tried to have them developed at a nearby drug store. Drug store employees notified authorities, police said.
``Who are they to tell me what I can and can't show to my own children?'' the mother said.
05/29/05 05:48
© Copyright The Associated Press. All rights reserved. The information contained In this news report may not be published, broadcast or otherwise distributed without the prior written authority of The Associated Press.
Anyone have asprin!!!
I must have drank 20 Bud Lights yesterday. It was a sight to see stock_rancher mowing his lawn all jacked out of shape, the first thing I did this morning is count my toes......LOL! Everyone have another fine day, I'm heading back to bed for another hour or two.
Dear stock_rancher,
Intense, intense, intense! From May 27 to June 2 we?ll all be under the influence of a T-square between Venus, Mars and Pluto, meaning everyone will be on their biggest, loopiest emotional roller coaster.
The T-square is a concentrated, dynamic three-planet combination. It's created when two planets -- in this case, Venus and Pluto -- form an opposition (think standoff), which is difficult enough. But this aspect is further complicated by a third planet, combative Mars, who will make a stressful square to the other two.
When Venus, the planet of love and emotions, and Mars, the planet of action and aggression, both meet up with powerful Pluto, the entire world can feel topsy-turvy. But your focus will be on interpersonal relationships. Who exactly is in control here anyway? Even the smallest issues (like what movie to see or what to have for dinner) can trigger major power struggles. Jealousy can raise its ugly green head, and sexual energy (shall we call it tension?) will run high.
The best way to deal with any challenges that come your way right now is to take lots of deep breaths, realize that everyone's affected by this astrological weather and know that it will soon pass. Keep in mind that minor events can trigger major upheavals; now is a time to tread carefully in your relationship. A Compatibility and Conflict Reading can help you understand how you and your sweetie will fare during difficult times like these. Try it now at 20% off and uncover the tips you need to smooth out the rough patches in your relationship -- and make the fun times even better!
Sincerely,
The Astrology.com Team
http://www.astrology.com
http://shop.astrology.com
Teamlasvegas,
"What happens here stays here".....LOL! I had to reply, you have done your DD!
Mr. Bill, Look at the ABLE Board on YAHOO!
Only place I posted, stock_rancher
pdc021376,
You arer now above the law!
Jim Bishop,
I need that T/Shirt! A couple of years back I did the YAHOO! Investment Challenge and won...... more like kicked ass! I was looking for my baseball champion cap and got a YAHOO! Finance Shirt, 1 of 1 in existensce! It's bagged and will not go out the door unless a charity like Imus Ranch is involved...... anythig for the kids. I believe on this Memorial Day we can contribute by doing what we are doing.... business as usual. I have 14+ Bud Lights under the table and am going for twenty. I once called my Grandmother and asked her how she is doing, she said I'm sill amoung the living........ a wise quote we all can follow. GVRP will not get in our way, it will lead to the road out of this land. We all strive for something better, it's the SEC and NASDAQ (NASD) that will show us the way. Good Nite all, and GOD bless!
Dr Worm,
We are confirmed with trades last week. I'm sitting tight with the shares in the street at this point. The only reason I will call them hame is to take some legal action. I'm giving the SEC and more importantly the NASDQ (NASD) the opportunity to make this right. Here is the chance for the regulatory agencies to stand behind individual investors and bring a positive outcome to the situation. Never say it's over until it's over..... way too many lives at risk. I made split-chicken breast with angus hamburgers...... and catchup! Dozen or so Bud Lights........
Get'her done!
Guy, I do the same thing.
I love it when my trade flashes in the live-streamer. It's way too nice to be indoors today. I'm going to light the grill and grab a lawnchair. There are alot of neighbors out for Memorial Day, I believe I'll do the same thing. Everyone have a great day.
Fox 2029, "Semper Fidelis"
I have a 55 share Buy @ $2.50 Friday that did not post in your list. May have been double printed lower or added with someone else's trade.
The Monday through Thurs would reverse 3,000,000 for 1 and the market comes out @ $6.50, the close on Friday before F/S