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There'll be another ...
Naked short sellers will be whipped and whipped again until their racket ceases to be the fraud of choice.
NAKED SHORTING - the fraud of choice in the penny stock markets.
http://www.sec.gov/rules/proposed/s72303/jagmedia010504.htm
FROM:
Thomas J. Mazzarisi
Executive Vice President
& General Counsel
tjmazzarisi@jagmedia.biz
January 5, 2004
Via E-Mail/rule-comments@sec.gov
TO:
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Attention: Jonathan G. Katz, Secretary
Re: File No. S7-23-03/Regulation SHO
Ladies and Gentlemen:
We would first like to thank the Commission for the opportunity to comment on proposed Regulation SHO, which is intended, in part, to reform short selling rules to curb serious abuses resulting from illegal naked short selling. As our company is a small business issuer on the OTCBB, we will focus most of our comments on those portions of the proposed rule that relate to naked short selling and its effect on issuers on the OTCBB and their shareholders.
Historical Context
The OTCBB began operation in 1990 as a result of important OTC market reforms mandated by the Penny Stock Reform Act of 1990 (the "Penny Stock Act"). The Penny Stock Act sought to increase transparency in the OTC markets to combat pervasive penny stock fraud by, amongst others, requiring various disclosure requirements for broker-dealers of penny stocks and the development of an automated quotation system for penny stocks (which became the OTCBB). These reforms represented a quantum leap forward in the regulatory structure of the OTC market at the time.
With a basic quotation system in place and broker-dealers being required to make some disclosure to clients regarding the risks of investing in penny stocks, the next major reform regarding penny stocks came nearly a decade later, when in 1999 the Commission approved the OTCBB Eligibility Rule. On a phased-in basis, OTCBB companies were required to report their current financial information to the SEC in a timely manner, the same as listed exchange companies had long been required to do. These two reforms, which focused predominantly on issuers, formed the basic underpinnings of the regulatory structure with respect to the OTCBB as it exists today. While these reforms have greatly improved the integrity of the OTCBB and gone a long way in making it more difficult for parties to perpetrate the types of penny stock fraud that were prevalent in the 80's and early 90's, these reforms simply could not effectively address naked short selling, which is the new fraud of choice in the penny stock markets.
The single most important flaw in this regulatory structure is that it focuses only on protecting investors from unscrupulous penny stock issuers. While no legitimate OTCBB issuer would question the need for such protections, no penny stock reform can truly be effective unless it acknowledges that the OTCBB, while still far from perfect, has matured since 1990 giving rise to new risks for investors that result from the actions and inactions of parties other than issuers. Unless the Commission is willing to fully reflect this concept, not only in the proposed Regulation SHO, but also in its day-to-day policy decisions regarding OTC market regulation and enforcement, any reforms that are implemented will be strictly cosmetic and not provide penny stock investors with the protections they need and deserve.
The Problem
With the regulatory structure of the OTC markets keenly focused on issuers, it became apparent to many parties that there was a loophole in the system which presented them with the opportunity to reap windfall after windfall by financing OTCBB issuers through what has come to be commonly referred to as "toxic" or "death spiral" financing. These windfalls were made possible by the following factors coming together to create the ultimate golden goose:
A regulatory structure focused almost exclusively on protecting investors from unscrupulous issuers;
Parties having the ability to engage in toxic financing with cash strapped OTCBB companies where there is no downside limit on the price of the stock they were to receive for their financing;
Toxic financiers having the ability to naked short the stock of their OTCBB target without an affirmative determination ever being made that the stock they are shorting can be borrowed;
Broker-Dealers not requiring short sellers to buy-in their naked short positions and settle their trades for substantial periods of time, if ever;
Market makers having no real check on their ability to engage in naked short selling of OTCBB issues for purposes other than bona fide market making activity.
Reporting of short interest in OTCBB issues not being mandated (as it is for issues on listed exchanges), thereby allowing all of the above to take place under a veil of complete secrecy.
The Result
With the above factors festering for years, whatever integrity was brought to the OTC markets by the Penny Stock Act and the OTCBB Eligibility Rule has largely been eradicated and we now have a market where investors cannot be certain of something as fundamental as whether they truly own the shares of the company on which they have spent their hard earned money. Some of the results of unchecked naked short selling include the following:
Issuers and investors are unable to determine the true number of shares outstanding in their stock on any given day. In determining an issuer's outstanding shares, the transfer agent takes into account the number of registered shares on the transfer agent's books and adds to that the position it maintains on its records for CEDE & Co., the nominee for "the street." While shares can move between the transfer agent's registered stockholder list and the CEDE & Co. position, in no instance can the number of outstanding shares lawfully increase unless new shares are issued by the company. However, on any given day when naked short positions are created, short sellers, broker-dealers and market makers create the appearance and effect of newly issued shares but are never required to account for the additional dilution which they create.
Since naked short positions (or normal short positions for that matter) are not reported by the OTCBB, disclosure is inherently deficient for OTCBB investors, since they are deprived of the opportunity of making informed decisions regarding the effect that naked short selling may have on the company in which they have invested.
The counterfeit shares created by naked short selling have a trickle down effect on investors and issuers. For example, investors who believe they are shareholders in a company, but who bought from naked short sellers, are routinely deprived of the right to vote on important corporate matters that affect their investment. If a company has 20 million shares outstanding and on any given day a naked short position of 10 million shares, there are now 10 million additional shares which cannot be lawfully voted since votes on any corporate matter cannot exceed the number of outstanding shares as reflected on the books of the transfer agent. What results from such situations is that broker-dealers must arbitrarily determine which shares are voted.
Just as investors can be stripped of their voting rights, as described above, investors can also be denied dividend distributions due to naked short positions. Using the example in 2. above, a company would only be able to issue a dividend to the holders of its 20 million lawfully outstanding shares. Therefore, once again broker-dealers must step in and arbitrarily determine which of their clients receives the dividend and which holders of the 10 million counterfeit shares will be excluded from participating in the dividend.
Each day that the naked short position of 10 million shares, in our example above, is not bought-in the issuer experiences a real dilutive effect, which it would not have experienced but for the naked short position. Most OTCBB issuers go to great lengths to control dilution to protect shareholder value and make day-to-day decisions that take into account the potential dilutive effect of certain actions. For example, the OTCBB company with 20 million shares outstanding may decide to reduce expenditures or delay potential growth initiatives in order to not incur significant dilution at that point in time. And all along, while the issuer is struggling to control dilution, naked short sellers, broker-dealers and market makers are creating, with total impunity, the dilution which the issuer has struggled to avoid. In addition to such dilution being involuntarily created, both the issuer and its shareholders experience this very real dilutive effect while receiving absolutely nothing for that dilution. This is hardly the telltale sign of an efficient and transparent market.
Naked short selling makes it more costly and difficult for OTCBB issuers to raise money, which is the life blood of small developing OTCBB companies.
A large number of companies are left with no alternative but to devote company resources to protecting their shareholders against naked short selling practices, which, were it not for such practices, could be devoted to more constructive ends.
The proliferation of lawsuits which have been initiated relating to naked short selling and toxic financing have a chilling affect on legitimate financiers who would otherwise be interested in financing OTCBB companies, but elect to forego such opportunities for fear of being embroiled in litigation.
The Solution
When examined closely, the history and effects of naked short selling on the OTCBB paint an unfortunate picture of a market where transparency and disclosure have been rendered an illusion and investors are unable to determine whether the company they are intending to invest in has 20 million shares outstanding or the functional equivalent of a number of shares far in excess of that amount. We believe that this situation has created a crisis in the micro cap markets that requires not only prompt implementation of the reforms set forth in Regulation SHO but also implementation of other reforms to begin to restore some level of integrity to the micro caps markets.
To do this, it is not sufficient for the Commission to implement Regulation SHO, or some variation of it, since this will only address matters going forward and leave completely unaddressed the fundamental problems and inequities that years of unchecked naked short selling abuses have brought to the micro cap markets. Accordingly, we strongly believe that the following actions, related and unrelated to Regulation SHO, must be implemented immediately to effectively deal with this problem:
All broker-dealers with positions in OTCBB issues should be required to immediately report their short positions and fails in those issues. This information should then be made publicly available and updated daily on an ongoing basis.
All broker dealers and market makers with naked short positions that are open for more than 2 days past settlement date should be required to buy-in those short positions immediately and settle such outstanding trades (even if they are for the accounts of customers). We do not see any legitimate reason why a short seller cannot deliver securities by at least T+5. Further, mandatory buy-ins are the only effective remedy for dealing with naked short selling abuses, not to mention the fairest and most efficient way to correct the problem. Through forced buy-ins the market imbalances created by naked short sellers are corrected once and for all and the clean-up costs are imposed equitably on the parties who created the mess. If they are guilty of creating a large naked short position, the cost of correction will be high, and rightfully so. If the naked short position they created is less substantial, the market insures that the cost will be commensurately less. When the various market scandals arose in 2003, the Commission and legislature acted swiftly and decisively in imposing the regulatory burden to correct such wrong doing on the parties who were in the best position to prevent such events from occurring again, the issuers themselves. The naked short selling crisis is no different in that respect and therefore the regulatory burden should lie squarely at the feet of the short sellers, broker-dealers and market makers who are responsible for the problem. Further, if short sellers fail to buy-in their naked short positions as required, broker-dealers should be obligated to effect the buy-in on behalf of their customer and then seek recovery from the customer. This serious remedy would cause broker-dealers to initiate meaningful internal safeguards that would significantly curtail naked short selling abuses from arising in the first place As long as issuers and investors are required to pay the price for the actions of naked short sellers and the inaction of their broker-dealers, the problem will never be solved effectively.
In light of the current state of the OTCBB market, it is nearly impossible to envision that "easy to borrow" or "hard to borrow" lists can be compiled with any accuracy for OTCBB issues. Accordingly, we believe that the test of "reasonable grounds to believe that the security could be borrowed" of the proposed "locate" requirement should apply to each short transaction and not be susceptible to satisfaction from any blanket assurance lists.
We agree that market makers involved in bona fide market making activities should be exempt from the "locate" requirement. If, as the Commission assumes, most market makers seek a net "flat" position at the end of each trading day, and in fact do so, then the exemption should not be problematic. However, if a market maker elects to make a consistent market on the "sell" side without any meaningful activity on the "buy" side, as is frequently the case in OTCBB issues, they should in all instances be required to deliver securities sold short in T+5. The role of a market maker is to maintain liquidity and an orderly market, which is strictly a function of daily market conditions. Accordingly, there is no reason for bona fide market making activities to result in naked short positions for any extended period of time.
While a step in the right direction, the proposed consequences set forth in Regulation SHO for failing to deliver securities fall short of what is necessary to insure that naked short positions do not languish for extended periods of time. Take for example a short seller who creates a naked short position of 1,000,000 shares in an OTCBB issue over a two week period. The only regulatory consequences that the short seller and broker-dealer face in this situation are that the broker-dealer is now barred from taking short sale orders from that short seller for that security for a period of 90 days and may, in addition, face a fine or some other administrative action from NASD. Since the short sellers have made their money and the broker-dealers have made their commissions, this consequence amounts to little more than a transaction tax to parties who are making millions of dollars from such naked short selling. In addition, although short sellers will be barred from shorting that security through the broker-dealer they just used for their naked short sale, it appears that nothing prevents them from shorting that same OTCBB issue through another broker-dealer, thus allowing them to circumvent the intent of the rule. Short sellers who don't deliver securities within T+5 should be barred from shorting any securities through any broker-dealer until those securities are delivered.
Some commenters have indicated that naked short selling should be permissible since it serves as a counterbalance to overzealous OTCBB stock promoters and assists the regulatory bodies in keeping such promoters in check. Some even go on to suggest that naked short sellers serve an even higher purpose by weeding out companies who, due to faulty business plans, don't deserve investor dollars. The absurdity of this position is mind boggling. First, naked short sellers, broker-dealers and market makers should not function as a deputized lynch mob for any regulatory body. The notion of any regulatory body tacitly appointing these parties, who are the cause of the naked short selling problem, to insure any type of market stability would be the equivalent of the commission appointing Enron to oversee corporate governance reforms when that scandal came to light. The success or failure of any public company should be determined by its shareholders in a free market with a level playing field.
Although it cannot be directly addressed by Regulation SHO, the Commission should also give consideration to the effect that Canadian broker-dealers have on the naked short issue in the United States. It is our understanding that naked short positions can be lawfully maintained by Canadian broker-dealers and that as a result a flood of naked sales have been initiated in US markets through Canada. A close examination of potential regulatory reforms in this area should be undertaken by the Commission, including an examination of the role of The Canadian Depository for Securities in this matter.
The naked short selling issue is a very complex and thorny issue for the Commission to address. However, despite its complexity, the problem screams out for a simple solution. With respect to the problem that has been created to date, the applicable parties who created the problem should be required to buy-in their naked short positions and restore some integrity and balance to the micro cap market. As to the regulatory burden going forward, that should also be imposed squarely on the responsible parties, who in this instance are also the parties that are in the best position to carry out the regulatory reforms and bear the cost of such regulatory burden.
Very truly yours,
JAG MEDIA HOLDINGS, INC.
By: _______________________
Thomas J. Mazzarisi
Executive Vice President
& General Counsel
A letter from John Martin
--------------------------------------
I have not commented on things for a long time. I think it is time to do so.
I must confess that Bill and I have had a difficult time continuing to work on this case with the lack of support from some shareholders. There are those, who are arm chair quarterbacks who think they have all the answers. (You all seem to have no trust in anyone.) There are those of you who are so caught up in UC, that you can’t see what has happened (I know, because I was there); and then there are those who see blood so red, that you are willing to file a suit at any cost for revenge.
I don’t want to forget to acknowledge the truly supportive group of the hundreds of shareholders that understand what they have in Bill Frizzell. These individuals have donated incredible amounts of time and money. In addition, many have actually taken the time to send us encouraging e-mails and cards. They have no idea how encouraging their words and gestures mean to us.
Bill Frizzell is walking a very fine line. He has to deal with some of the most selfish individuals I think I have ever encountered. He has to deal with a company that has done a lot of things wrong, HOWEVER, may have the goods. He has to deal with the SEC; he has a law license to protect; and he has to work for 5,000-6,000 shareholders who deserve to receive their due. He has to juggle information in a way that does not completely destroy the company in which we all have believed; and he has to know what to tell his clients without informing the enemy. On top of all this, he has to deal with little funding. Folks, we are spending most of our time attempting to convince people we are doing the right thing! I know you cannot see it, but Bill is spending 10-12 hours per day on this, and we are at a junction that could make or break our efforts to succeed for all of us.
Now, allow me to set some things straight. There is a concerted effort to destroy this group’s unity. Bill Frizzell has never done anything to cause anyone to doubt his word or his character. If he says there will be no class action suit, he means it! In addition, he is not going to give the information to another attorney to do so for him. If Bill says that when he files a lawsuit with a few plaintiffs for reasons that are evident, and says that all shareholders will benefit if there is a settlement, then that is the case! PERIOD! How many times do we need to state things to be believed?? Do some of you actually believe we have staged a set up to take advantage of people that have been hurt like we all have? Do you really think that? Those of you who have made comments along these lines should be ashamed of yourselves. Oh, and let me say one more thing. The Owners Group Inc was formed to attempt to prevent the scamming of innocent investors ever again - NOT because Bill and I want to line our pockets. For those of you who understand public companies, no one gets rich going public if it is done so legally and ethically - at least not until after many years of hard work! I have been literally sick to my stomach over the stench from the rotting souls from the fraudulent crooks that steal from unsuspecting shareholders all over this country. I guess I was naive as to what actually was going on out there in our markets, but some of the most gosh awful things happen out there every day, and I plan on standing up and making a difference!
I watch the boards every day, and have come to the conclusion that some people are just lonely and downright mean. They have nothing better to do than cast personal doubt on us so that others will jump on board with them. I do not think they are bashers, I just think they are people who enjoy making others think the same way they do: Misery loves company.
I know it is hard to believe, but there are some people in this world who do things for others not intending to reap reward. I know it is difficult to understand why anyone would work at least 10 hours a day and risk his Law Firm and his family for people he does not even know!
Let me tell you why Bill is such a person… because we have calls almost daily from those who fear they have lost everything. Widows who have no one to rely on who have dumped all their money into this company; people with cancer who are trying to make one last effort at supplying income for their family before they die; seasoned investors who have in excess of a million dollars at risk. The stories go on and on and on. We are almost in tears some days with the stories, as well as the cries for help.
Let me give all of you a summary of where we are in this CMKX saga.
Several years ago, some seriously evil people took advantage of Urban Cassavant. Evidently, UC bought a dirty shell when he formed CMKI. That means there was very fine print, which would cause him many problems in the future: Problems that forced him to pay extortionists along the way, i.e. a dilution agreement and toxic financing. We feel, and hopefully will not be proved wrong, that UC is not the mastermind who diluted this stock. We believe it was done to keep up with the agreements in the contract. We assume UC put the claims in the 025 company for the purpose of keeping them safe. We do not think UC did this to keep them from the shareholders. Bill and I are in the process of investigating the extortionists. We think they deserve to pay for what they have done. They are present in dozens of other companies, and are doing the same thing to them. Their day is almost over!! We believe that once they are out of the way, UC will then be able to do the right thing and do whatever he must to give his shareholders their due.
Bill and I want very badly for all shareholders to be paid for their investment. We are not interested in hurting that situation in any way. Bill is not interested in long-term litigation in any way. He is not looking for job security. He is not searching for a way to make a fortune here. He is looking for a way to help all of us innocent shareholders who have been stolen from. There is no underlying reason for what he has done, or is doing, other than justice!
We need for all shareholders to rally here! The extortionists will not have to pay capital gains taxes on hundreds of millions of dollars that they have swindled if this company does not survive. We need for CMKX to make it for more than one reason, not just ourselves.
One last thought. I get numerous e-mails every day asking me if I thought there is anything left here for us shareholders. If we thought there was nothing to gain, we would have already stepped away and let you all know the facts. We believe the “goods” are there. We know we have a huge naked short (835 billion shares, including cert holders, and NOBO lists, and with just 20% of street shares faxed in, leaving 80% not even reporting! This does not begin to mention those who are not included from other countries.) These two things alone can be our winning combination.
CMKX Shareholders, it is time to UNITE!
As Bill would say, “ONWARD”
John
Which means ????????
A Dozen Answers From Dr. Byrne
By Patrick Byrne
August 24, 2005
On Aug. 18, Seth Jayson wrote an article that asked 12 questions of Overstock.com (Nasdaq: OSTK) CEO Patrick Byrne. Dr. Byrne graciously responded. The Motley Fool has edited Dr. Byrne's comments, mostly for brevity and clarity, but granted Dr. Byrne the ability to accept or reject the final article. That you see this online is evidence that Dr. Byrne has acceded to its publishing in this form. The thoughts expressed below are Patrick Byrne's and do not represent the views or positions of The Motley Fool or its authors or employees.
Dear Mr. Jayson,
Though your interrogatories came with your own preamble, you instructed me to answer without reference to larger issues. I respectfully reject your instruction. As Wittgenstein wrote, "If a lion could speak, we would not be able to understand him." He knew that frames of reference may be so dissimilar that communication is difficult. In such cases, playing junior prosecutor over details ("But isn't it true that ... ?") is fruitless.
The best way I know to proceed -- and I suggest readers do the same -- is within the construct of a three-point paradigm. First, the number of shares traded each day that constitute failures-to-deliver (FTD) is staggeringly and unacceptably high. Second, those making money off of these failures to deliver have a pecuniary interest in obfuscating issues. Third, though it is colored as such in the press, our lawsuit is not about short selling stocks.
Q. How can investors be sure that this entire drama isn't just the result of a colossal clash of egos?
A. What part of "illegal" don't you understand?
Overstock has been on the Regulation SHO fail-to-deliver list for nearly seven months with the exception of a few weeks straddling March-April, though the SEC predicted no company would be on the list for more than 13 days. The people who nightly determine that Overstock belongs on the Regulation SHO list refuse to tell me how many FTDs there are. Why? Assume there are 10 million Overstock fails scattered in the system. That means $400+ million of stock. Brokers are charging 20-30% interest to loan our stock: Thus, there is $80 to $120 million of illicit annual income generated wherever in the system those FTDs reside. And Overstock is one stock of 150 on the list: A Freedom of Information Act request forced the SEC to disclose that 6% of all shares traded daily on the major exchanges constitute failures to deliver.
Q. You alleged [on] Friday [Aug. 12] on CNBC that Herb Greenberg --- among other journalists -- is actively participating in this conspiracy in order to help Rocker and others front-run or otherwise trade illegally in your stock. What, exactly, do you claim is the motivation for the alleged conspiring journalists?
A. Captured regulators get there in various ways: laziness, flattery, bribes. In the case of financial journalists, there is a continuum:
Some work hard, are smart, and could be analysts themselves;
Some work hard but rely heavily on leads from hedgies;
Some sit by the phone and wait for it to ring with calls from hedgies;
Some just drink beer and play poker with hedgies;
Just maybe, a couple take tips in offshore bank accounts from hedgies (there are bent priests, bent cops, bent judges: Is the thought of a bent journalist incomprehensible?).
I do not know where on the continuum Herb sits, but I think it is not at the top.
Q. You said on CNBC [on] Friday [Aug. 12] that the only evidence you have in this case is affidavits given by people who claim to have previously been involved in the scheme ... you read from an affidavit which said "it appeared" that the players in the conspiracy were orchestrating attacks on you. Is that the strongest evidence you've got?
A. No, there was much more, even in that affidavit (only a few lines of which I read aloud). I also have internal company documents and emails, and material regarding other parties (I never said that all three affiants were from Camelback, did I?). I am not sure which is "the strongest."
Also, respectfully, I never said "only" or that I had "nothing" else: Readers should view this link to confirm for themselves (see minute 4:00 to 4:30).
Q. Why should anyone, in the public or the courtroom, trust the statements of people who were (or are) involved in perpetrating the very same stock scam that you're protesting?
A. Conversely, how can you impugn someone for being involved in a scheme and simultaneously deny it exists? It's like saying, "I don't believe anyone sells heroin. What, these guys said they were part of a gang that sells heroin? Well, you cannot trust anyone who was once a heroin dealer. Therefore, there is no evidence that anyone sells heroin."
These guys thought they were working in legitimate shops, learned how the game was played, and skedaddled.
Q. How much is this litigation going to cost Overstock shareholders, including the money needed to defend against the defamation suits that have already begun to come your way?
A. It has been costly to date. Now it is in the hands of O'Quinn, Christian, Voyles, and others. They took this (along with all countersuits) on contingency.
Remember, on my Aug. 11 conference call I detailed a lawsuit, but it is not about shorting. We discovered evidence of a "research" firm that was providing information to some clients before others, permitting those preferred clients to edit that research and trade ahead of its publication, and were themselves secretly running a hedge fund front-running that same research. All of this is, I believe, improper, so I filed a lawsuit alleging unfair business practices among these blackguards.
In the course of that investigation I kept coming across the same several hedge funds and journalists and with a little research discovered a set of relationships among them. In my conference call I explored relationships within that circle, folks about whom I stipulated I had no knowledge of anything improper. What's David Einhorn going to do, sue me for mentioning he is married to Cheryl Einhorn? Or that he knows Jules Kroll? Is Kroll going to sue me for saying they investigate companies for hedge funds? Let them. I just talked about relationships: Why, did they look like a conspiracy to you?
It is true that I disclosed that I had detected signs of a background player whose role remains murky, but who may not give instructions so much as set priorities. Because his involvement remains unclear, I chose to identify him only as "the Sith Lord." But our lawsuit has nothing to do with these other players, shorting, naked shorting, or Sith Lords. The financial journalists' mantra-like repetition of the claim that it does cannot change that fact.
I have explained the slop in the settlement system and the financial rewards it generates at the expense of small companies, the incentives that exist to use blue smoke and mirrors to confuse the facts, my decision to make a difference by grabbing one thread of the tapestry and pulling hard, and the profoundly degenerate intellectual and moral level of those engaged in the obfuscation. What's in it for me? Criticism and derision, but that's OK: When you stand for things, you get used to it.
Q. Let's be honest. You know more than one billionaire, and you say that you, family, and friends already own an enormous piece of Overstock. Why not just avoid the hassles of the public market, give shareholders the $77-ish per share that your lawsuit suggests the stock is worth, and take it private?
A. We did. About 100% of the shares are owned by family, friends, and a handful of institutions (I don't know for sure). The problem is, there exists an additional 3%-70% of the company in electronically counterfeited shares scattered throughout the system. Why pay to buy up counterfeit shares?
Q. You claim there is a "Sith Lord" controlling your stock price. It would seem to me that rather than trying to short Overstock straight into the ground, a clever Sith Lord would do better to let the stock rise at some point, and play both sides of the action. Have you any evidence that your stock's big rise in late 2004, or any subsequent pop, could have been orchestrated by the Sith Lord, prior to taking his short position?
A. False. First, stock prices are not "controlled" deterministically. Second, I said the Sith Lord's role is murky to me: If it exists, it seems less about control than about priorities (like Osama bin Laden to al-Qaida). Respectfully, the rest of your statement/question is unsound and, as it concerns Sith Lords and stock prices, is blue smoke and mirrors.
Q. Your lawsuit claims that the Sith Lord's conspiracy is directly responsible for the fall in your stock's price. Yet other heavily shorted stocks that appear on the Reg SHO list, such as Netflix (Nasdaq: NFLX), NetEase (Nasdaq: NTES), True Religion (Nasdaq: TRLG), and Shanda (Nasdaq: SNDA) are doing just fine, as you can see from this chart. How do these companies resist the power of the Sith, and why can't Overstock do the same?
A. Again, I do not know that the Sith Lord is "directly" responsible for anything. Remember, the only "conspiracy" I alleged is between Rocker, Cohodes, and Camelback. Other than that I just talked about relationships: Again, did they look like a conspiracy to you?
Q. For better or worse, you have become a controversial figure because of the naked short issue. Would Overstock shareholders be better served if you stepped down as CEO but remained as chairman of the board?
A. My father will be chairman shortly. I would love to step down as CEO. But I am hearing from so many dozens if not hundreds of investors, essentially all of whom support this fight; I cannot let them down.
Truth is, I want to go walkabout. But Stormy [Simon] does not want to be CEO (and given what she did to Meade, as is described below, I think Rocker is better off with me here).
Q. What do your many family members, friends, and mentors like Warren Buffett -- who have achieved business success in their own right -- think of this effort?
A. Mr. Buffett is off limits. Of the others: One knows the players well, says they are truly bad people and to make sure I don't wind up face down in a ditch.
Don't worry, Seth: I am bulletproof and invisible.
Q. There's been a lot of controversy regarding your relationship with "Bob O'Brien," a man who hides behind a pseudonym ...
A. Not to me. I know who he is (and he is not James Davidson). But the test of any theory (or theorist) is its ability to make accurate predictions. Bob made far-out but, in the end, accurate predictions about journalists, David Rocker, and our trading. Why get hung up on personalities?
... and issues vicious, unsupported attacks against anyone who disagrees with him.
A. False. O'Brien's vicious attacks are generally heavily supported.
Yes, his writing is acerbic (and he is more sarcastic in person!), but I think it is the whole vox clementis in deserto thing. To the extent that I have any input with Bob, I have asked him to be kinder and gentler. But I'll take "right" over "kinder and gentler."
Q. Do you think your shareholders would be better served if you distanced yourself from him and his organization, which you have helped to fund?
A. I helped fund Bob and also tried to rein him when he went overboard. On balance he has done our shareholders a favor. Incidentally, does the vindictiveness of Herb, Jesse [Eisinger, of The Wall Street Journal], and Jeff Matthews concern you equally, or is your outrage selective?
I'll give you an example that speaks to the obfuscation I spoke of above. Several years ago my friend and colleague, Stormy Simon, put a killer (David Meade) behind bars. For four years the police had searched for a witness of whom they knew only a name, "Stormy" (which they mistakenly assumed to be a stripper's nom du stage: They thus confined their searches to Intermountain strip joints). They never found her. At the end of Meade's trial it seemed certain he would walk out of court a free man, but in a John Grisham-like twist, Stormy surprised everyone by showing up in the courtroom (though Meade had told her that if she did she would end up face down in a field with a bullet in her head). Her testimony put Meade away for life. She is a hero to the Salt Lake City homicide detectives and prosecutors, one of whom just wrote a book, "Death in a Fish Pond," the climax of which is Stormy's out-of-the-blue heroism (the other witness, incidentally, did end up face down in a field).
A second example concerns a story I told on my conference call concerning how, when I came to suspect there were leaks in my environment, I created two pieces of disinformation to which I gave controlled release. I watched for blowback and, when it came, used it to trace the problem.
How does this play in the hands of Jeff Matthews, whose "blog" (he disallows dissenting opinions so it is not a real blog) lets him be the most vocal of the hedge fund-journalists? Jeff omits the context of my story and the crux of the Stormy story (that she was never a dancer, which is why the police never tracked her down), so he could write lengthy pieces about how Byrne is a whacko, he talks about cocaine and gays and has senior vice president strippers, etc.
Q. Fast-forward a year. You've won damages of $500 million in this case. Do you track down all past shareholders from the period of the alleged damages and pay them for their losses? Do you pay it to current shareholders as a special dividend?
A. Maybe I donate it to the people whose lives and companies were ruined by financial thuggery. Maybe I pay for real regulators who won't hide under their desks. But it will take more than a year.
In closing, I must mention that we recently fired someone we believe was a mole passing information to hedge funds. Just before getting canned, the mole's primary focus was asking around the office, "What is the special relationship between The Fool and Patrick?" (For the record, I hope Bill Mann and the Gardners would agree that we have a cordial but distant relationship: The principles The Fool espouses are simply the same ones I learned as a kid and from which I now operate. Excluding interviews, we probably talk once per year, if that. But to outsiders it may look like we coordinate like, well, a bunch of reporters and hedge funds who play poker and talk three times per week.) [Editor's note: We agree.]
Thus, I now think that the miscreants understand the threat that an uncaptured financial news source like The Fool represents to them. They will seek to capture it. So you guys should be on the lookout for any journalist who suddenly shows up at The Fool trying to further the hedgies' agenda (by, say, bashing their shorts, spinning our lawsuit as being about Sith Lords and naked shorting, etc.).
Warm regards,
Patrick
P.S.: Jeff Matthews' smears against Stormy notwithstanding, I do have a couple good friends who were wigglers (and another who was a call girl). All three are finer human beings than the average Wall Street hedgie, journalist, etc. To have a hedge fund quisling like Matthews denigrate the way they make their living is hilarious.
This is a better read than Ragingbullchit ...
STOCKGATE TODAY-August 23, 2005
An online newspaper reporting the issues of Securities Fraud
Naked shorting; It’s not a big thing…..August 23, 2005
David Patch
For anybody that has ever talked to a financial news reporter regarding naked shorting, you have to have heard them say “It is not a big thing” spew out of their mouths like it was gospel. They say it so casually; it is like these guys actually had the evidence proving that it really was nothing. For me, I always wondered where they obtained such definitive information. I mean the SEC has never provided such documentation and I have been fighting with them for years. Wall Street won’t provide such critical information as they fight ever motion for discovery. So where did the media obtain such critical information and, if they have it, why not publish it.
Due to circumstances that transpired last week, the discussions surrounding naked shorting have elevated in the press. Outside of one theStreet.com reporter that appeared to look deeper into the issues, all others who reported on the Overstock.com lawsuit against Rocker Partners and Gradient Analytics crucified everybody or anybody who spoke of the subject matter. Ironically, the lawsuit against Rocker Partners and Gradient analytics didn’t even mention naked shorting. The lawsuit was about the denigration of Overstock.com in calculated negative reviews and press releases. A lawsuit where the legal team for Dr. Patrick Byrne is two former Attorneys from the SEC’s Division of Enforcement, one a former regional manager and the other a key member of the naked shorting team at the SEC.
But while reporters such as MarketWatch columnist Herb Greenberg, Dow Newswire columnist Carol Remond, Motley Fool columnist Seth Jayson, NY Post columnist Roddy Boyd all wrote repeated articles on Dr. Byrne and CNBC Analyst Ron Insana ridiculed the efforts of Dr. Byrne none actually came up with any definitive facts that could refute what Dr. Byrne had to say. Nobody has yet to explain why a company like Overstock.com has been snuggled nicely on the SEC’s Regulation SHO threshold list for nearly 8 months with excessive shares oversold and unsettled; definition of naked shorting. Worse, none could explain why there was so much focus on refuting a “non-issue.” Certainly none picked up on the legal team for this cause.
Ron Insana, host of CNBC’s Street Signals, went so far as to bring forth a debate between Dr. Byrne and RAM Partners Hedge Fund Manager and Overstock critic Jeff Mathews. While Dr. Byrne read from a reportedly signed affidavit from a third party witness that implicates reporter Herb Greenberg in the scheme to denigrate, host Ron Insana could only use personal friendship with Greenberg as a counter to refute the signed affidavit. Ron didn’t have any proof the affidavit was false; he only knows that Herb is an upstanding guy who repeatedly trashes Overstock.com and other Rocker supported short positions because he is a good evaluator of performance. The fact that Greenberg, Mathews, and Rocker were also columnists for theStreet.com created by CNBC correspondent James Cramer was never mentioned.
Now what Mr. Insana also never divulged was the massive amount of film footage and dollars parent station NBC and Dateline NBC spent covering the naked short selling story. Dateline NBC filming hundreds of hours of footage and dedicating over 18 months of time and energy on the story that remarkably covered less air time than their commercial segments.
Dateline actually obtained access to convicted criminals willing to tell all about how US Brokers were being paid to raid small stocks. Footage never presented to the public.
Mr. Insana also never indulged the audience with the evidence Dateline had in their possession regarding the owners of the settlement failures in the collapse of Eagletech Communications (EATC), the flagship to their ultimate story. Hundreds of thousands of trades executed at near $10.00 levels that resulted in settlement failures persisting for over 250 trade days and were only covered at $0.50/share. The evidence hand delivered to Eagletech by the Securities and Exchange Commission under court subpoena and in the hands of Insana. But naked shorting is not real! It is a myth because upstanding guy Herb Greenberg says it is.
For hedge fund manager Jeff Mathews in this mockery, Mr. Mathews could not explain why he has focused so much time and energy into refuting the claims of people with “tin-foil hats” instead of focusing on his business at hand. Jeff Mathews writes his own blog with every month focusing attention on the “lunatics fighting naked shorting” and Dr. Patrick Byrne specifically. Mr. Mathews ridicules CEO Patrick Byrne on a regular basis for focusing on short sellers when Regulation SHO claims Overstock.com is oversold with excessive settlement issues yet Mr. Mathews himself focuses on what every reporter and hedge fund calls a myth. So who is crazier?
Ultimately the issue comes down to something simple. The SEC needs to come clean with full transparency to the problem.
The SEC claimed that naked shorting was not an issue yet held in their possession evidence of an increase in the number of trade fails taking place. The number of fails increasing as our markets was becoming more efficient and more electronic. The SEC admitted, in preparation to Reg SHO, that in some cases the fails had become so pervasive that the number of fails exceeded the entire public float of some companies thus incapable of satisfying buy-ins. SEC Attorney in charge of drafting regulation SHO Jerry Carpenter stating “We cannot force mandatory buy-ins because there are more shares unsettled than shares to settle with.”
To combat this issue the SEC created regulation SHO citing its sweeping reform potential yet grandfathered all prior settlement failures from requiring closeout. Why, because the fails were too pervasive to be cleaned up during a six-month window between approval and implementation. Six Months grace period to clean up the books!!! The SEC claiming they feared creating “short squeezes” if they forced a rapid closeout of trades once the rule was implemented.
If this were your local police, and they told you there was no speeding problem yet they set up speed traps all over town you would question their honesty. Now if they set up speed traps but offered no radar guns you would question their motives. SHO is that speed trap without the radar guns.
Why every reporter would rather attack the messenger instead of evaluating the evidence is beyond me. Wall Street has never proven a place of ethics or a place of integrity. Hedge funds sound the battle cry of being abused yet it is repeatedly the hedge funds we find Wall Street breaking laws to aid. Hedge funds bring too much wealth to the industry to turn down their needs regardless of the laws.
Bottom Line: If it is such a non-issue, show us the proof. Explain the companies entrenched for months on the SHO list. Explain the massive level of fails that remain in the system today, the DTCC claiming over $6 Billion in unsettled trades in their control, with our markets being presented as the most efficient in the world. Finally explain the grandfather clause in light of the SEC claiming the fails are not pervasive. If it is so small, why bother to violate Section 17A of the Securities Exchange Act of 1934 when drafting new law.
Follow the stench of Reg. SHO and ask the simple questions the SEC refuses to answer.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2005
Overstock.com sues hedge fund
Overstock.com claims a hedge fund and a research firm conspired to drive down its share price.
August 12, 2005: 2:27 PM EDT
By Amanda Cantrell, CNN/Money staff writer
NEW YORK (CNN/Money) - Overstock.com, an online retailer, has filed a complaint against hedge fund Rocker Partners and research firm Gradient Analytics, claiming the companies conspired to drive down Overstock.com's share price.
The complaint, filed in Marin County, Calif., alleges that Gradient is closely aligned with various hedge funds, including Rocker Partners.
In addition, it alleges that Gradient withheld publication of negative reports on Overstock.com to give Rocker Partners time to adjust its portfolio. The company started issuing reports on Overstock.com in June of 2003, and the complaint alleges the firm issued 58 reports on Overstock.com over a two-year period.
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The complaint claims Gradient got input from Rocker Partners founder David Rocker and portfolio manager Mark Cohodes, who are also named as defendants in the suit, and that Gradient "knowingly serves as a shill" for the hedge fund.
Gradient had been publishing negative reports on Overstock.com for months before Rocker became a client, however, according to a report in The New York Post, which cited a person familiar with the situation.
Overstock.com's complaint acknowledges that short sales of Overstock.com increased markedly months before Gradient began issuing reports on overstock.
Overstock.com alleges Gradient's reports were influential in driving the company's stock price down from its January 2005 high of $77.18 to its closing price yesterday of $45.43, according to the complaint. The company alleges that short sales of its stock have "virtually exploded," reaching seven million shares by June 2005.
"Legitimate shorting is a fair, honorable, legitimate way to conduct business. I have no beef with anybody for short selling – more power to you," Patrick Byrne, Overstock.com's founder and president, told CNN/Money. "What irks me is discovering that there has been some person paying an allegedly independent analyst group to doctor their research."
Overstock.com said its revenues are consistently growing and that its stock price had performed well in the market before publication of the research. But short sellers have been critical of the company. Overstock.com reported a net loss of $2.5 million in the second quarter, compared to a net loss of $2.3 million a year earlier. Revenue grew 72 percent from the year-earlier quarter.
Byrne said the company may file similar actions in the future if its investigations reveal what it feels to be unfair practices.
"We are going to pursue discovery aggressively and follow the rabbit trail of unfair business practices wherever it leads," Byrne said.
"There is a fraud going on in this country where offshore hedge funds dwelling in an unregulated environment are selling massive numbers of shares short and doing various schemes not to cover (their short positions)," said Wes Christian, a partner at law firm Christian Smith and Jewell, one of the firms representing Overstock.com, referring to the fact that shares previously sold short have to be repurchased in order to close the open position. "In the process, companies are getting destroyed, technology is getting destroyed, and hard working Americans are getting screwed."
Short sellers have argued that they are protecting ordinary investors by exposing fraudulent practices at companies. One oft-cited example is famed short seller James Chanos' exposure of the massive fraud at Enron.
Rocker is one of a small group of hedge funds that employ short selling as their primary strategy. Short selling involves borrowing a stock and selling it with the intent of buying it back later at a lower price, profiting from the drop in stock price. These managers short the stock of companies they believe to be overvalued.
Rocker is one of the best known short sellers, having founded Rocker Partners in 1985, when relatively few hedge funds existed. Today, there are an estimated 8,000 hedge funds.
Rocker Partners did not return a call before press time, and Gradient declined to comment.
Popcorn, popcorn anyone? Popcorn ....
This afternoon, shareholders of Overstock.com, along with the company, filed a groundbreaking suit against Rocker Partners, David Rocker, Marc Cohodes, Gradient Analytics (AKA Camelback), Donn Vickrey, and several other defendants in California State Court, alleging unfair business practices, and conspiring to denigrate Overstock.com's business so as to reap personal profits for themselves and for their companies.
The attorneys representing the plaintiffs are the O’Quinn Group, headed by Texas legend John O’Quinn, of big tobacco, Phen-Phen and DTCC suit fame. This is an extraordinarily well-funded consortium that can see this through to its inevitable conclusion, which will likely go on to name more entities and individuals going forward, as the facts of the case become known, and discovery is obtained.
Let me start off by saying that I’m not an attorney. I don’t claim any particular legal acumen, nor should my claims and comments be construed as any sort of statement of absolute fact – this is my opinion only, and should be taken as such.
Having said that, it appears to me that the inevitable has occurred. The bad guys have been caught with their hand in the cookie jar, and they are now going to benefit from a free and open disclosure of their misdeeds in an open court, and their techniques made part of the public record. If the claims in this suit are true, then the investors in the funds named are likely going to have significant cases against the managers of the funds, as the complaint alleges that they have participated in what to me could only be described as a systematic, organized campaign designed to depress the share value of OSTK, in order to create financial windfalls for the hedge funds and their associate conspirators. This takes on an ominous RICO characteristic, as if true we are talking a regular pattern of illegal behavior by disparate entities, colluding and acting in concert to achieve a criminal end result.
I applaud the plaintiffs for stepping forward and sending the message that this wholesale abuse of the system will not be tolerated, and I celebrate the attorneys who have stepped up to the plate to bring the perpetrators to justice.
For years, the shareholders of companies like NFI, PPD, KKD, TASR, TTWO, OVTI, NAVR, ACAS, ALD, and OSTK have been convinced that the precipitous drops in the value of those companies’ shares, and the seemingly coordinated assaults (including media attacks, class action suits, questionable regulatory probes, radio and television eviscerations, message board onslaughts by vocationally driven teams), were part of a Byzantine scheme driven by some dark force, some group that had so co-opted the regulators and the media that there was no hope of justice or fair treatment.
Now we have a face to put to the force, or at least the tip of the iceberg. Everyone should read the complaint and familiarize themselves with the charges. It would not surprise me a bit if this was followed by criminal charges being brought – if true, the alleged behavior is certainly criminal (in my untutored opinion) and deserves the prompt attention of regulators and the Department of Justice.
It’s interesting to me that the market greeted the news of the suit with an increase in the share price this afternoon. Other companies that have released news of lawsuits have experienced price drops – like NFI, when they sued PMI, and Herb jumped all over it, and the price declined precipitously. It is difficult to predict how the market will take news like this – but apparently the market liked the news. The bashing posters would have us all believe that this is folly, a nuisance suit, evidence of Byrne being unbalanced - but the market apparently sees things differently. I do hope that the trading from today becomes part of the case - it would be fitting if the trades turned out to be the same accused perpetrators selling more non-existent shares in a further effort to damage the company's share price. How much clearer would it have to be?
It is ironic that Dr. Byrne offered fair warning of discrepancies and concerns over the company’s trading in the last conference call. I’ve been wondering for some time how a company like OSTK, whose shares are essentially 100% owned by the Byrne family, their friends, and institutions who are intimately connected with them, could have huge a such a huge short interest, really un-coverable without driving the price into the stratosphere. Well, here’s an explanation. The bad guys allegedly intended to drive the company into the dirt while breaking the law – a handy way of investing, if true, as you don’t have to be correct about the company, just adequately funded and motivated to do whatever it takes.
I cannot believe that there isn’t a huge element of truth to the charges – they certainly resonate with me, and what I have been saying for some time. Now I suppose we will get to find out whether these poor hedge funds and their associates are being unjustly accused, or if they are actually as dirty and vile as we have long suspected. My hunch is that the stink wafting from this is going to turn out to be overpowering, and will involve big and influential Wall Street names before it is over, and will finally force the “see no evil” regulators to confront the decay and morbidity in the system, as well as within.
This is a huge blow to the hedge funds’ bankers as well, as if they have been complicit in aiding this organized predatory scheme, they will get sucked into it, as will the investors in the funds, their satellite of media cronies, complicit money men, and their dirty tricks operatives. As this unfolds, I am confidant that the truth will prevail, and if the allegations are true the ugly web of lies, deceit, larceny, misappropriation, collusion, etc. will unwind and strangle the perpetrators.
It can only be a matter of time before the other companies that have been preyed upon follow this lead and we see other legal challenges to a practice that the system seems content to ignore. This marks an important day for investors, and for the companies that have been targeted by this network.
It is a day that many have been waiting for, and a few have been dreading.
I shall follow the proceeding with interest.
Pundits have long been expecting a cartel of hedge funds to implode, creating a cascading domino effect in all the companies that they are short, their leverage now their worst enemy - speculating as to what the trigger would be.
Folks, I think we have ourselves the trigger.
Now, I’m sure that the industry will circle the wagons, and decry this as foolishness, and pretend that it isn’t happening, just as they have with Dr. Byrne’s now famous Q2 conference call, wherein he compared the short position in OSTK to a bus hurtling towards a cliff, while he tried to warn that the bridge was out. I’m certain that the network of enormously influential friends and co-conspirators will actively try to spin this as a non-issue, even as they eye one another for signs of flop sweat or cooperation with the authorities…as they try to figure out who will be the most likely to roll. Once it registers on them that this isn’t going to go away, and that the whole ugly truth will be known, that there isn’t any way to cover this up (as they have apparently been doing for years), you can expect distancing from the bomb blast zone. Nobody is going to want a piece of this when it becomes clear that it is going to reveal all.
I would think that the brokers that facilitate this sort of game are at risk now, as it can only be a matter of time until their role is uncovered. I would believe that they have to be trying to figure out what happens next. I’m quite confident that there are calls going out to reassure everyone that it is all going to be fine, we are good for it, have no fear, we’ve weathered worse than this. The problem is that they haven’t – the only time they’ve even come close is when L&H filed against many of the same bad guys, and they didn’t have the financial staying power to fight to the conclusion – that, and the company was up to no good. That wasn’t a challenge – that was a softball. This is the A team coming over the hill with guns blazing. A legal team with virtually limitless financial resources and access to the very best talent, well prepared for the inevitable barrage of counter-measures and stalling tactics, ready to dismantle the ugly machine and show the world its component parts.
I have a feeling the names in this are a who’s who of Wall Street, and wouldn’t be at all surprised if you see a full court press to discredit everyone and everything associated with this effort – the plaintiffs, the attorneys, the company (even thought they aren’t a party to the suit), Dr. Byrne, probably even me (I’m not a plaintiff, but they just don’t much like me, so I expect that they will target me for a slamming). I can hardly wait to see the first salvo from the hedge fund quislings, the Carols, the Jesses, the Alperts, the lapdogs, all professing that this is stupid, or unfair, or typifies companies that are in trouble, etc. The spin machine will likely now go full speed, as the bashing crews are currently doing on the message boards – no conspiracy there, folks, no siree.
All of which won’t change the story that the trading records and emails and phone logs will tell. And that is, at the end of the day, their problem. The trading tickets will tell the story, just as they did in Operation Bermuda Shorts, where a far less sophisticated group was caught with over 1200 accounts to do related party trading and evade the US rules, preying on OTCBB companies.
This suit is the first step in the process of the market getting a glimpse of the seedy underbelly of the industry, and the predatory practices that are its stock in trade. It should be quite a show.
And we have ringside seats.
Popcorn, anyone?
David Patch
Hi Capt - the plot's thickening alright.
Don't leave it too late.
Have you got your CMKX certificates yet?
Committee: US Senate Committee on Banking, Housing, and Urban Affairs
7/13/05
Title: Money Laundering and Terror Financing Issues in the Middle East
This is a 2 Hour, 15 minute video,
http://banking.senate.gov/05_07hrg/071305/archive.ram
More info here,
http://banking.senate.gov/index.cfm?Fuseaction=Hearings.Detail&HearingID=153
If you look at the recipe for the NSS scandal, you’ll see the ingredients are the same as the Savings & Loan scandal:
1. Greed
2. Big money
3. Lots of crooks
4. The government
5. The hapless investor
I remember reading the news for weeks on end as the S&L debacle unfolded in the mid-80s. I can’t even begin to go into detail on the S&L story. I think every American should read up on it. I guarantee you will become angry! You’ll swear you’re reading fiction. It is beyond insane.
No one who looks at it objectively can blame the Reagan or Bush administrations. The Dems were every bit as guilty. Llyod Bentson and the Clintons were neck-deep in it. Greed has no loyalty to parties.
Long story short: In the mid-70s, a senator named Jake Garn was able to get some very specific banking regulations lifted, and the crooks went nuts. For 10 straight years, they looted Savings and Loans across America. The state of Texas was the worst. The bad guys crashed 137 Texas S&Ls, stealing over $3 billion. In Arizona, a banker named James Fail (he didn’t fail here) put up just $1000.00 of his money to buy 15 troubled S&Ls. He then requested $1.2 billion in government relief. You guessed it! The federal govt gave him the money. A banker in Utah bought a S&L, and that same week, he paid himself $50 million dollars for a piece of land he owned. The land appraised at $850,000. This isn’t a joke! That’s how lax the regulations were. Convicted felons and their pals were buying S&Ls all across America.
(I wonder if any of these guys are doing the hedge fund thing now?)
As an American citizen and taxpayer, I guess I was too naïve, and too trusting of our government to think this couldn’t happen again. It looks like the NSS debacle is going to be even bigger. The SEC is in a lose-lose situation, and that’s right where they deserve to be. If they admit to any complicity in the NSS, they admit their own guilt. If they say they weren’t aware, they are admitting gross, gross, gross incompetence. IMO, there are going to be too many angry people this time around, screaming “It’s happening again!” The regulators turned a blind eye, and let the crooks do it all over again.
BTW, the clean-up for the S&L failures was originally estimated to take 8-10 years, with a cost to the taxpayers of just under $100 billion. The GAO(general accounting office) says the bailout is still going on! The tab, including interest, is now thought to be at $450 billion.
Think about it Capt … if you're capable.
AFTER ENRON, it is almost impossible, and no auditor will even think about taking a risky company, let alone a company in a hearing about to get revoked.
UNLESS ….
Unless they knew 100% for sure the company was legit. Auditors do their homework on a company, and there would be extra scrutiny on CMKX for sure. We have signed on with one of the best auditors in America, that says everything. We are a legitimate company now, and the bashers can talk to himself. The worst part about these loser bashing this stock, they own more shares than me.
Hang in there... CMKM Diamonds Inc. - CMKX
I'm usually frustrated with Andy, but this was interesting. The last two replies (from him and me) took place today.
Anybody have any ideas?
----- Original Message -----
From: Tray
To: Andrew Hill
I hold xxx million shares and I've been in for 2 years now. I'm with Ameritrade and if I want to sell it's an all or nothing deal.
Now, please explain to me why I shouldn't jump ship and get what little I can back out of my original investment while I still can. If I don't hear back from you, I'll have to assume you have no good reason.
Good day to you.
----- Original Message -----
From: Andrew Hill
To: Tray
Hello Tray...
I trust you saw the 8k on Friday confirming we have retained one of the top auditor firms in the land. Everything takes time and now we must be patient while the auditor does his work.
Andy
----- Original Message -----
From: Tray
To: Andrew Hill
Fair enough, but why wasn't this done a year ago or even six months ago instead of dragging us all through the mud?
----- Original Message -----
From: Andrew Hill
To: Tray
There are very specific reasons which I am not at liberty to discuss. Hang in there.
A rigged system ... the offshore money launderers are accused of exploiting weaknesses in the centralized book entry clearing and settlement system used by each of the nation’s stock exchanges.
PIPE Players Accused of Global Stock Scheme
The PIPEs Report
Part One of a Three-Part Series
by Brett Goetschius
July 1, 2003
Some of the most active private placement agents and investment managers stand accused of conspiring to defraud hundreds of small-cap companies, including dozens of Private Placement in Public Equity (PIPE) issuers, TPR has recently learned. Specifically, government investigators and plaintiffs’ attorneys are charging the defendants with executing stock-kiting schemes to exploit loopholes in the U.S. stock clearing and settlement system. Through these methods, the agents and managers allegedly inflated small-cap companies’ downside trading volumes and reaped massive profits from short positions.
The allegations are contained in court documents and investigative reports of U.S. and Canadian authorities. An ongoing joint U.S.-Canadian investigation into the matter has already yielded 58 indictments of U.S. and Canadian offshore brokers and hedge fund managers. Those arrested include Mark Valentine, former president of the defunct Toronto brokerage Thomson Kernaghan. Valentine’s firm was closed by the Ontario Securities Commission a year ago. Its closure led to the largest claim ever against the Canadian commission.
Thomson Kernaghan is named in a $2.6 billion lawsuit filed in May by Sedona against its placement agent, Ladenburg Thalmann; several former Ladenburg executives; New York-based PIPE fund manager Rhino Advisors; and several offshore funds and securities firms associated with Rhino and British Virgin Islands-based Creon Management. In the lawsuit, a copy of which was obtained by TPR, Sedona’s attorneys assert that former Ladenburg executives Michael Vasinkevich, David Boris and Thomas Tohn schemed with Creon fund manager David Sims, Rhino principal Thomas Badian, and Rhino-managed funds Amro International, Roseworth Group, Cambois Finance, and Markham Holdings to defraud Sedona and its shareholders through the illegal manipulation of the funds’ investment in a $3 million floor-less convertible PIPE issued by Sedona in January 2000.
The Sedona suit goes on to allege that Rhino used its funds and cooperating broker/dealers in the U.S., the Caribbean, and Canada, including Thomson Kernaghan, to orchestrate a campaign of massive, uncovered short-selling of Sedona’s stock, despite specific prohibitions against such activity in the stock purchase agreement. Sedona claims this naked shorting campaign “painted the tape” with extraordinarily high selling volume and decimated its share value, ultimately allowing Rhino’s funds to convert their securities into common stock at a fraction of true value.
The SEC filed suit this spring against Rhino and Badian, alleging Badian manipulated the market through an illegal short-selling campaign against Sedona. The commission claimed Rhino was using brokers and electronic exchanges based in the U.S., Canada, and offshore to hide and wash short trades even after the NASD placed short restrictions on the stock. Rhino settled with the SEC for $1 million without admitting or denying the allegations.
All of the defendants in the Sedona suit have filed to have the case dismissed. Southern District of New York federal judge Kimba Wood has yet to set a hearing to rule on the motions. Court papers filed in the case set out for the first time the exact nature of the scheme. The papers also reveal the alleged players in a conspiracy that Sedona’s attorneys, famed tobacco and implant-liability lawyer John O’Quinn and accomplished attorney Wes Christian, believe has victimized hundreds of small-cap companies and cost shareholders billions.
A Rigged System
Some of the investors accused in the scheme have connections to offshore and European trusts operated by alleged money launderers working for the Russian mafia and Colombian drug cartels. Even more intriguing and insidious than these claims, however, are the methods used by the defendants to perpetrate the fraud. They are accused of exploiting weaknesses in the centralized book entry clearing and settlement system used by each of the nation’s stock exchanges. The Sedona court papers shed light on how market participants can manipulate the system, operated by the Depository Trust Company and known as FAST. The court papers argue that perpetrators have exploited the book-entry clearing system to “kite” stock by selling short shares and allowing the trades to fail, or covering them via surreptitious, off tape purchases that can drastically inflate a small-cap company’s outstanding float and greatly distort trading volume on the sell side.
Such a scheme was allegedly executed using Sedona stock by former Ladenburg executives working in concert with Rhino and its offshore network of hedge funds, U.S. market makers Wm. V. Frankel and Westminster Securities, and Thomson Kernaghan.
“The story here, in our belief, is about a rigged system. That rigged system occurs by virtue of a broker/dealer community that doesn’t deliver securities in a timely manner. We believe [the perpetrators] are aided by a lack of procedures at the DTC and the National Securities Clearing Corporation, each of which is owned by the broker/dealers,” Christian said last week in an interview in New York, where he was taking depositions for the case. “The case got much larger than just some bad guys and some money launderers when those guys found holes in the system and began using them profusely. They wouldn’t have been allowed to do this if everybody had been enforcing the rules that were created to keep this from occurring.”
Christian, of Christian, Smith & Jewell, and O’Quinn, of O’Quinn, Laminack & Pirtle, have devoted 70 attorneys to the 20 suits the Houston-based firms have filed against Rhino and other alleged perpetrators of the stock-kiting schemes. Christian says he expects to file similar suits on behalf of another 80 companies in the coming months.
“The Goldman Sachs of Small-Caps”
According to Sedona’s complaint, the scheme began to unfold shortly after Michael Vasinkevich and his team from Paul Revere Capital moved into Ladenburg Thalmann’s Long Island branch offices in the summer of 1999. There, they began soliciting financing business for Ladenburg’s structured finance group. At the time, Vasinkevich and the Paul Revere team were working with former Ladenburg executive vice president David Boris. Boris, now a managing director at Morgan Joseph, is a defendant in the suit. (All of the Sedona defendants contacted for this article declined to comment.)
Vasinkevich, in an August 1999 letter to Sedona’s CFO Bill Williams, asked Williams to consider using Ladenburg’s Secondary Offering Substitute and Private Placement Alternative, or “S.O.S.,” PIPE program to raise capital through a private offering. In the letter, Vasinkevich boasts of Ladenburg’s access to “$50 billion” of investment capital and trumpets Ladenburg as “the Goldman Sachs of small cap companies.” Vasinkevich goes on to describe the S.O.S. program as a “hard floor” convertible program that protects small-cap issuers like Sedona from short selling and arbitrage plays:
“S.O.S. . . . enables a company to raise funds when and as needed. The company sets a hard floor - a threshold price below which it will not issue any stock. The company knows exactly how much money it can receive every month during the life of the S.O.S. Product. Since the company decides when and how much money to draw down, the S.O.S. Product offers market ambiguity as to timing and dollars raised, keeping short sellers and arbitrageurs at bay.”
In what Sedona calls a “bait and switch” by Vasinkevich and former Ladenburg associate Thomas Tohn, Ladenburg allegedly agreed to provide up to $50 mil-lion over time through the S.O.S. program, beginning with a commitment to place up to $17.5 million. Sedona announced the initial agreement in January 2000. As part of the financing program, Vasinkevich subsequently suggested Sedona issue $3 million of variable-priced convertible preferred stock. He said it would “serve as interim financing in case our proposed underwritten common stock and warrant deal is delayed due to the SEC review of the registration statement,” according to a late December 1999 fax from Vasinkevich to Sedona’s Williams.
The Ladenburg PIPE did indeed include a $3.50 per share “hard floor” on the securities’ conversion pricing—but only for the first 90 days. After that, the fixed conversion price was replaced with a “floorless” pricing formula that used a conversion price equal to the lesser of $5.12 and “95% of the aver-age of the three lowest closing bid prices” of Sedona’s common stock during the 20 consecutive trading day period immediately preceding the conversion date, according to Sedona's S-3 filing for the offering.
Notably, the terms of the stock purchase agreement prohibited holders from engaging in any short sales of Sedona stock. Sedona executed the PIPE offering with Ladenburg in late March 2000. The company’s shares traded near $6 on the Nasdaq Small Cap Market.
The Offshore Players
Sedona agreed to pay Ladenburg a fee equal to 1% of the face value of an expanded $50 million shelf registration, plus 6% of the gross proceeds from each sale of the securities, and warrants equal to 7% of the gross proceeds. Ladenburg placed Sedona’s convertible securities with several funds managed by Rhino Advisors, Badian, and David Sims, a principal at Creon and British Virgin Islands-based Beacon Capital Management.
Rhino placed the Sedona securities with several offshore funds managed by Sims and a David Hassan of Gibraltar, including Amro, Roseworth, Markham, and Cambois Finance. Amro, which has invested more than $47 million in Rhino-managed PIPE deals according to private placement research firm Placement Tracker, is identified in SEC filings as a “sister fund” of Creon. Other filings declare Roseworth and Cambois as being wholly owned by Creon. Creon is also listed as the guarantor of another PIPE fund that uses the address of H.U. Bachofen in Zurich, Switzerland. Bachofen is, in fact, president of Amro. Finally, a funding announcement filed with the SEC in April 2000 by Stockgroup.com, a Rhino PIPE investment, states of Rhino that “in three years of operation its investment strategies have nearly quadrupled the base capital deposited into Amro and Creon.”
Several of Rhino’s funds, including Roseworth and Markham, are registered to a Lichtenstein-based law firm, Dr. Dr. Batliner & Partner. Batliner, who claims to hold two doctorates (hence the double Dr.), is a former German federal judge and confidant of former German chancellor Helmut Kohl. He has been the subject of investigations by German intelligence, reports of which were leaked to Der Spiegel, linking the doctor-doctor to money laundering operations with the Russian mafia, the Medellin drug cartel, the Ferdinand Marcos family, and Kohl’s Christian Democratic Union party.
Batliner has denied all wrongdoing. Nonetheless, Badian told The Daily Deal in October 2001 that Rhino had ceased doing business with Batliner after the allegations came to light. Christian said that Batliner and his firm would be added to an amended complaint in the Sedona case, expected to be filed soon.
With the $3 million of financing from the Ladenburg PIPE in hand, and a commitment letter from Ladenburg’s Boris to place up to $50 million in financing for the company over coming months, Sedona issued a press release in May 2000 announcing that it would increase its shelf registration to $50 million in anticipation of additional Ladenburg led placements. Ladenburg, however, would never fund even the original $17.5 million commitment announced in January 2000, despite alleged assurances from Ladenburg and Rhino that they could provide “all the financing the company would ever need.”
Within 90 days of closing the convertible preferred offering with Rhino, Sedona’s stock price would plummet from over $10.25 per share to less than $3, wiping away $195 million in value. By the end of 2000, Sedona’s stock hovered near $1 a share. Sedona executives, suspicious of trading patterns in its stock but still desperate for capital, would soon find themselves working on a second PIPE with Ladenburg and Rhino to retire the previously issued convertible preferred shares. It would be Sedona’s last offering as a Nasdaq-listed company.
Good news for CMKX - Justice within reach.
To all CMKX Owners Group members:
Bill has called in about his meeting today with Senator Sarbanes office, and I wanted to at least let you know a few things that went on before he returns and brings you all up to date more thoroughly.
The meeting took place at 2:30 eastern time, with Senator Sarbanes Chief Council Steve Harris. From what I understand, Mr. Harris is the director of the Senate Banking Committee. Also present was Senator Sarbanes Legislative aid Dean Shahinian. Judi Behrens a CMKX shareholder, who set up the meeting, was also present. The meeting was to be held tomorrow initially, but was bumped up to today due to business on the Hill. Bill scrambled to the airport in Dallas on short notice very early this morning and went on standby in order to catch an earlier flight. Fortunately he arrived a few hours before the appointment.
Bill said that Mr. Harris asked very good questions, and was very knowledgeable about the issue. Mr. Harris knows there is a problem, and requested that Bill begin to funnel information to him. He also requested that we begin to involve the main stream media as much as possible.
Bill said the door of communication is wide open, and that he is very positive about the entire meeting. He had the opportunity to go through very carefully, all of our evidence of Naked Shorting.
Bill will return on Saturday, and I am sure he will update everyone more thoroughly after the holiday.
I hope you are all able to enjoy this long weekend, sorry I don’t know more to share.
"ONWARD"
John
Bush Administration portrays a stock market plagued by counterfeit shares and hedge fund manipulation as a safe place for Social Security dollars.
June 16, 2005 (FinancialWire) German Chancellor Gerhard Schroeder is saying what Bush Administration officials are afraid to confront as it tries to portray a stock market plagued by counterfeit shares and hedge fund manipulation as a safe place for Social Security dollars – “lending” of shares need to be controlled.
In the U.S., hundreds of public companies and their shareholders have been victimized by the illegal, but unchecked practice, according to the Regulation SHO lists, containing such companies as Cal-Maine Foods (NASDAQ: CALM), Array Biopharma (NASDAQ: ARRY), IBIS Technology (NASDAQ: IBIS) and Internet Initiative Japan (NASDAQ: IIJI), recently in the center of a massive up and down price struggle.
Chancellor Schroeder said his proposals will be presented to the Group of Eight world leaders when it holds its summit next month.
“We need effective supervision world-wide and much improved transparency on the hedge-fund market,” Schroeder was quoted as saying.
Among the proposals are reporting restrictions on stock lending by hedge funds, and greater transparency.
In the U.S., the Depository Trust has been mentioned by the media, in protests and in lawsuits as having a role in the counterfeit securities scandal known as Stockgate that several U.S. Senators have complained about regarding illegal short selling of public companies on the “threshold lists” such as Global Crossing (NASDAQ: GLBC), Generex (NASDAQ: GNBT), IMAX Corp. (NASDAQ: IMAX) and Sharper Image (NASDAQ: SHRP).
Such a relationship could catapult DTCC and its oversight agency, the SEC, into violations of the First Amendment to the Constitution over DTCC’s admitted interference in the publication and distribution of FinancialWire via Investors Business Daily to Yahoo (NASDAQ: YHOO) and other portals served by IBD.
The DTCC is also a strong suspect in the sudden and inexplicable “postponement” of an expose of the organization that had been scheduled by Dateline NBC, owned by General Electric (NYSE: GE), that could parallel the interference into Viacom’s (NYSE: VIAb) CBS show, 60-Minutes, by the tobacco industry when that network was owned by Westinghouse, that was profiled in the award-winning motion picture, “The Insider,” starring Russell Crowe and Al Pacino.
A demonstration at DTCC’s headquarters in Manhattan has been scheduled July 29.
The “National Counterfeit Conspiracy” event is profiled at http://www.americaneedstoknow.com/DC_trip.htm .
Meanwhile, a stock transfer agent, Transfer Online Inc., has asked U.S. Securities and Exchange Commission Chair William Donaldson to put a stop to the control the Depository Trust & Clearing Corp. and Automatic Data Processing (NYSE: ADP) are fast gaing over the transfer business, and to demand DTCC transparency.
Excerpts from the letter, posted at http://www.faulkingtruth.com/Articles/LettersToEditor/1012.html , states
The letter to Donaldson and to market regulation states: ”“Over the years as the amount of shares held at DTC has increased it has become more and more difficult to determine who owns the shares, who is trading them and if the trading is proper. This trend, and the resulting problems I will detail below, continues to increase because a minority of the total number of shareholders are reflected on the books and records of the corporation, most activity takes place behind the wall of ownership that is designated as Cede & Co. and neither the company nor the transfer agent has any access to the underlying information.
“Furthermore, DTC recently managed to put through a rule change (Release No. 34-50758A; File No.S7-24-04) that prohibits a transfer agent from representing any company who seeks to withdraw from the DTC system. This change effectively leaves companies with no voice or choice in the management of their stock and their ability to have any transparency as to what is actually taking place in the market in regard to their stock.
“I receive calls from companies seeking information as they watch millions of shares trade in a single day, who watch their share price decrease in value and who have no access to information regarding who is behind the trading of these shares, or if in fact the trades are at all legitimate. As the system now operates, most companies have a large percentage of shares on their books registered to Cede & Co.
“Given the importance of shareholder voting and communication one would assume that the same requirements placed on transfer agents as to accuracy and reporting would be placed on ADP and Cede & Co. as they usually hold or service the majority of the shares owned in any given company.
“I have found; however, that when presented with the tabulation reports from ADP the share totals they report sometimes exceed the total number of shares outstanding for the company. Let me restate this because it is a very important part of my concern about a system that is more and more headed in the direction of increased control by DTC. The shares presented by ADP, that are the shares voted by the brokers on behalf of the shareholders for whom they hold accounts, EXCEED when added to the shareholders of record the total number of shares outstanding.
“Where are these extra shares coming from? Why are there no controls on the number of shares held in the nominee name Cede & Co. vs. the ownership on the books and records of the brokers and why is the company not privy to any information unless it pays whatever fees it is told it must pay by the organizations that control the data?
“In fact, as the system is evolving, DTC is de facto becoming the largest transfer agent in the industry even though it is an organization formed by and working for the interests of the brokerage community. If, ultimately, the S.E.C. is in place to protect investors then this issue can not be ignored because in the end when the market is completely under the control of the brokers and the organizations that represent them then the market can neither be transparent nor fair.”
In other Stockgate news, Senator James Talent (R-MO), has joined U.S. Senators Richard Shelby (D-AL), Susan Collins (R-ME), Robert Bennett (R-UT) and Richard Durbin (D-IL) in questioning U.S. Securities and Exchange Commission Chair William Donaldson about what they call the “failure” of Regulation SHO to curtail unlawful, predatory securities trading.
The current Senate line-up carries significant heft. Senator Collins is chair of the Homeland Security and Governmental Affairs committee, Senator Shelby is chair of the Senate Banking Committee, Senator Durbin is Assistant Democratic Leader and Senator Bennett is Republican Whip. The Senators’ letters are posted at http://www.americaneedstoknow.com
“Stockgate Today” publisher David Patch said that the Senators have 23 good reasons, citing that many companies, including Martha Stewart Living Omnimedia (NYSE: MSO), Delta Air Lines (NYSE: DAL), Krispy Kreme (NYSE: KKD) and Netflix (NASDAQ: NFLX), that remain “not settled” on the official threshold lists maintained by the New York Stock Exchange and Nasdaq five months later.
“Stockgate Today” is published at http://www.investigatethesec.com . The Senators’ letters to shareholders and the SEC are posted at http://www.americaneedstoknow.com
Patch said that most of the 23 companies hardest-hit by unlawful stock manipulations in full sight of market regulators, including those at the SEC, such as Annette Nazareth, head of market regulation, who belittles complaints as coming from those who “want to see their stock go up,” have had double-digit declines in stock valuations over the 94 days they have been on the highly-public list.
He also noted that in the March, 2005 Euromoney Magazine article on illegal naked short selling, Head of Market Regulation Annette Nazareth’s assistant, James Brigagliano said that prior lawbreakers were “grandfathered” because “we were concerned about generating volatility where there were large pre-existing open positions, and we wanted to start afresh with new regulation, not re-write history.”
“So does Ken Lay, but he can’t,” retorted Patch.
This disputed “grandfathering” has not yet been taken up by Congress, but the 23 companies on the threshhold list for over days are new transgressions, and presumably they can’t be dealt with either because Nazareth and Brigagliano are concerned about “generating volatility.”
Also, in a blockbuster event almost equal to the mysterious “postponement” of the announced expose of the Depository Trust and Clearing Corp. by General Electric’s (NYSE: GE) “Dateline NBC,” the U.S. Securities and Exchange Commission has inexplicably given the DTC’s National Securities Clearing Corp. “immunity” in the form of limited liability for willful misconduct or violations of Federal securities laws.
The Notice regarding the SEC’s action is at http://www.nscc.com/impnot/notices/notice2005/a6029.pdf
These and other events, including the proposed nomination of Director of Market Regulation Annette Nazareth, who has characterized opponents of illegal market manipulation as people “who just want their stock to go up,” to become a Commissioner, is providing more and more fodder for the organizers of public demonstrations and lobbying in Washington June 6 and in New York June 7. The organizers, who are filming a documentary, say demonstrators now number over 600.
Some legal experts are questioning whether the SEC, without the approval of Congress, has the authority to limit the NSCC’s liability. There have been similar questions about the SEC’s authority to unilaterally “grandfather” securities violations prior to Regulation SHO.
The new regulation is sure to be litigated since the DTCC and the NSCC were the subject of lawsuits claiming their “stock borrow program” is illegal counterfeiting, prior to the rule approval by the SEC.
The DTCC has also admitted to interfering with the media in impacting the distribution of FinancialWire on Yahoo (NASDAQ: YHOO) and elsewhere through malicious interactions with Investors Business Daily. The “Important Notice” from the DTCC regarding the NSCC demonstrates that the entities are a “self-regulatory organization” under the auspices of the SEC, which ramps up the media interference to First Amendment violations. FinancialWire’s counsel, Marshal Shichtman, Esq., is returning to the U.S. today and will be reviewing the new evidence.
The DTCC said that the “approved changes create a uniform standard limiting NSCC’s liability to direct losses caused by the NSCC’s gross negligence, willful misconduct, or violation of Federal securities laws for which there is a private right of action.”
In addition, the organization stated, “the changes memorialize an appropriate commercial standard of care that will protect NSCC for undue liability, permit the resources of NSCC to be appropriately utilized for promoting the accurate clearance and settlement of securities, and are consistent with similar rules adopted by other self-regulatory organizations and approved by the Commission.”
The DTCC had asked for the rule December 8, 2004. It is not known how the proposed rule slipped through the cracks on the public and Congressional levels prior to the approval.
The National Coalition Against Naked Shorting stated that the action was sought and approved hastily because “they have been willfully violating securities laws for years, know that it will come out in court, and want to have a piece of paper to fall back on,” adding that it corroborates “the theory that the stock borrow program violates a host of securities laws, that the NSCC knows it, and that they have been counterfeiting stock for years and just now are starting to catch on to the idea that they will get caught.”
Nazareth was quoted in February in the New York Times (NYSE:NYT) as “doubting” that threshold companies such as Overstock (NASDAQ: OSTK), Martha Stewart Living (NYSE: MSO) or Novastar Financial (NYSE: NFI) were being “manipulated,” and that victims of illegal naked short sales are simply people who want their “stocks to go up.”
She said those who complain of their losses to illegal trading activity have an attitude that “it’s a criminal conspiracy when stocks move the wrong way, and the government should do something about it.”
“What is criminal,” said one who believes Nazareth’s appointment, so far championed by U.S. Senators Charles Schumer (D-NY) and Harry Reid (D-NV), would be disastrous for small investors who someday expect justice and a fair playing field in the markets, “is that someone could be in a position of authority at all with this kind of anti-investor attitude.”
In his communication to SEC Chair William Donaldson, Sen. Durbin also contested the claim by the Depository Trust and Clearing Corp., a unit of the New York Stock Exchange and NASD, that it has no responsibilities under Regulation SHO.
Senator Durbin’s letter to Donaldson appears to sharply contest the Depository Trust & Clearing Corp.’s contention that it has no role in Regulation SHO.
“I am writing to request information regarding the June 23, 2004 Securities and Exchange Commission (SEC) short sale regulation, designated Regulation SHO. On March 9, 2005, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing on Regulation SHO, in which Chairman Bennett spoke with you about the regulation’s effects on the illegal practice of naked short selling. I thank you for your testimony and I hope that you can follow up on some of my concerns not fully addressed by the Banking Committee hearings.
“I appreciate the efforts of the Securities and Exchange Commission (SEC) to control abusive short selling practices. As a result of Regulation SHO, the names of firms with large amounts of unsettled shares are published on the Threshold Security List daily. This list assists individual investors in making informed decisions about potential manipulation of the market, and gives regulators and investigators a centralized list of firms with significant numbers of undelivered shares. However, it has come to my attention that Regulation SHO may not be curtailing abusive naked short selling practices.
“Several of my constituents have contacted me since the SEC introduces Regulation SHO. They have raised concerns about potential loopholes in settlement regulations. During your recent testimony before the Banking Committee, Chairman Bennett asked you about the ability of brokerage houses to shuttle unsettled shares every 13 days in order to avoid settling the borrowed shorted shares. Due to time constraints at the hearing, the committee did not receive a complete answer. This issue is worthy of a full response.
“Additionally, my constituents have expressed concern about SEC enforcement of Regulation SHO. While the Threshold Security List publicizes securities that might have been manipulated, I am concerned that some securities repeatedly appear on the list. What steps is the SEC taking to investigate trading practices that result in vast quantities of unsettled shares, and to punish those people who violate SEC naked short selling regulations? What is the SEC doing to ensure that the Depository Trust & Clearing Corporation (DTCC) is complying with Regulation SHO, and what actions does the SEC undertake when the DTCC identifies large quantities of shares that have not been delivered?
“It is important that the SEC identify abuses and prevent manipulative naked short selling practices that undermine faith in the market. Thank you for your attention to this matter. I look forward to your timely response,” Senator Durbin concluded.
Wells Fargo had written to Smith:
“The other broker/dealer who is short shares of your security is E*Trade. Though this type of activity makes it difficult to issue physical certificates, it is legal and within regulations.
“There is no definite date by which E*Trade would have to purchase the shares. In many cases, a broker/dealer will sell shares they don't hold hoping that the price will fall. If it does fall, the broker/dealer will buy the shares at that time, and deliver those newly acquired shares, making a profit. If the stock price continues to rise, the broker/dealer will eventually buy the shares and deliver them to prevent any additional losses.
“According to our trading desk, E*Trade was the only broker/dealer offering shares of GLKC yesterday. This has been the case since you originally requested your certificate. Anybody who has purchased this security in that time period has likely purchased the shares from E*Trade.
“You are free to sell the shares anytime. When E*Trade acquires shares, they would be delivered to the current owner. However, a certificate cannot be issued until the shares are actually received.
Pink Sheets head Cromwell Coulson has asked the SEC to publish short positions on all over the counter and bulletin board stocks, and that request is currently in a comment period.
The request for rulemaking, which Coulson has told companies traded on the Pink Sheets, is needed “to make regulators turn on the lights and protect investors from the menance of hidden short selling in the OTC market,” is at http://sec.gov/rules/petitions.shtml
In an email to Donaldson, Coulson had said “I believe that it is very important to require the disclosure of short positions because the lack of transparency is allowing promoters to defraud investors by blaming all selling on naked market maker short selling. Disclosure and transparency can easily remedy the issue.”
In other news on the naked short-selling front known as “StockGate,” adding to what TheStreet.com founder James Cramer calls the “Hedge Fund Relief Act,” the termination of the Uptick Rule, is the fact that those using illegal naked short selling in the past have been granted a kind of amnesty for acts before the first of 2005. The SEC just “grandfathered” those illegally-begotten gains and resultant counterfeit shares into the system, so these windfall gains are now available to downtick with reckless abandon on downticks.
The “grandfathering” admission is at http://www.sec.gov/spotlight/keyregshoissues.htm
In the same document, the SEC has inexplicably stated that not all forms of illegal naked short selling, the equivalent of counterfeiting shares in public companies, are actually “illegal.”
The DTCC actions in the StockGate mire are the most serious, if not notorious since the agent of two SROs, the New York Stock Exchange and NASD is also peopled by some 21 directors whose companies, such as Merrill Lynch & Co. (NYSE: MER), State Street Corporation (NYSE: STT) and Goldman Sachs (NYSE: GS), are unlikely to support the DTCC in what attorney Marshal Shichtman, Esq., has termed “strong-arm” tactics.
The DTCC has admitted it has engaged in an act of censorship of this newsletter in squelching its redistribution by Investors Business Daily, and via Investors Business Daily, to Yahoo Finance, a portal owned by Yahoo! (NASDAQ: YHOO), and it is a suspect in the sudden and so far unexplained “postponement” of a widely anticipated expose by Dateline NBC.
In a wide-ranging letter to the DTCC, Robert J. Shapiro has charged statements made by Larry Thompson, DTCC Deputy General Counsel, were “inaccurate or misleading,” and asked the DTCC to correct the record and respond to his comments and questions.
Shapiro is chair of Sonecon LLC, a private economic advisory firm in Washington, D.C., who served as U.S. Under Secretary of Commerce for Economic Affairs from 1998 to 2001, Vice President and co-founder of the Progressive Policy Institute from 1989 to 1998, and principal economic advisor to Governor William J. Clinton in the 1991-1992 presidential campaign.
He holds a Ph.D. from Harvard University and has been a Fellow of the National Bureau of Economic Research, Harvard University, and the Brookings Institution.
Shapiro currently provides economic analysis to the law firms of O’Quinn, Laminack and Pirtle, Christian, Smith and Jewell, and Heard, Robins, Cloud, Lubel and Greenwood, on issues associated with naked short sales, which he noted includes “matters raised in an interview published by @DTCC with DTCC deputy general counsel Larry Thompson.”
He asserts the following in his letter:
Thompson begins by asserting that “the extent to which [naked short selling] occurs is in dispute.” While this statement may be narrowly correct, objective academic analysis has established that naked short selling has been a widespread practice and one which, when allowed to persist, can pose a threat to the integrity of equity markets. A recent study by Dr. Leslie Boni, then a visiting financial economist at the SEC, analyzed NSCC data and found that on three random days, an average of more than 700 listed stocks had failures-to-deliver of 60 million-to-120 million shares sold short – naked shorts – that had persisted for at least two months. In addition, over 800 unlisted stocks on any day had fails of 120 million-to-180 million shares sold short that also had persisted for at least two months. The total number of naked shorts, including those that had persisted for less than two months, was presumably considerably greater.
Regarding the extent of naked shorts, Thompson has provided closely-related additional information: “fails to deliver and receive amount to about $6 billion daily…including both new fails and aged fails.” Thompson minimizes this total by comparing it to “just under $400 billion in trades (emphasis added) processed daily by NSCC, or about 1.5% of the dollar volume.” By most people’s standards, a problem involving hundreds of millions of shares valued at $6 billion every day is a very large problem. Moreover, the $6 billion total substantially underestimates the actual value of all failed-to-deliver trades measured when the trades actually occurred. Most of the $6 billion total represents uncovered or naked short sales, many of which have gone undelivered for weeks or months with their market price being marked-to-market every day. As a stock’s price falls, the market price of naked shorts in that stock also declines, reducing the total value of the outstanding failures-to-deliver cited by Thompson.
In other respects, Thompson’s comparison to the “$400 billion in trades processed daily by NSCC” seems disingenuous and misleading, because that $400 billion total covers not only U.S. equity trades which can involve most of the failures-to-deliver at issue, but many other transactions also processed by the NSCC. The value of all equity transactions on U.S. markets in 2004, for example, averaged $82.3 billion/day. If Thompson is correct that the daily value of fails-to-deliver averages $6 billion, that total is equivalent to 7.2 percent of average daily equity trades or nearly five times the 1.5 percent level suggested by Thompson. Furthermore, the DTCC reports on its website that on a peak day, “through its Continuous Net Settlement (CNS) system, NSCC eliminated the need to settle 96 percent of total obligations.” Assuming that CNS nets out the same proportion of trades on other days, $384 billion of the $400 billion in daily trades cited by Thompson are netted out, leaving only $16 billion in daily trades that require the actual delivery of securities. The $6 billion of fails-to-deliver securities existing on any day are equivalent to 37.5 percent of the average daily trades that require the delivery of securities, or 25 times the 1.5 percent level cited by Thompson.
Thompson tries to explain the large numbers of shares that go undelivered – in most cases arising from naked short sales -- by citing problems with paper certificates, inevitable human error, and the legitimate operations of market makers. This also seems misleading or disingenuous. Regarding problems with paper certificates, the DTCC estimates that 97 percent of all stock certificates are now kept in electronic form. Nor can human error or legitimate market-making operations explain the high levels of failures-to-deliver that persist for months – on any day, an average of 180 million-to-300 million shares have gone undelivered for two months or longer – as documented by Dr. Boni’s analysis of NSCC data.
Thompson also disparages the attorneys who represent companies that have been damaged or destroyed by massive naked short sales, and their shareholders, by claiming falsely that the cases in this matter have almost all been dismissed or withdrawn. The legal firms that I advise -- O’Quinn, Petrie and Laminack; Christian, Smith and Jewell; and Heard, Robins, Cloud, Lubel and Greenwood – have not lost any motions against the DTCC or its affiliates and currently have one case against the DTCC pending in Nevada and another case against the DTCC pending in Arkansas. In addition, on February 24, 2005, these attorneys were granted an order by the New York Supreme Court ordering the DTCC to produce trading records involving two companies they represent, including records from the Stock Borrow program, which may establish whether large-scale naked short sales were used to manipulate and drive down the stock price of those two companies.
Thompson also asserts that the plaintiffs suing the DTCC for damages associated with the handling of naked short sales rely on “theories [that] are not an accurate reflection of how the capital market system actually works.” This assertion is inaccurate. There is no dispute about how the capital markets work -- nor any doubt that naked short sales have been used to manipulate and drive down the price of stocks, as seen in numerous death-spiral financing cases. The issue here is the DTCC’s role in allowing or facilitating such stock manipulation through its treatment of extended naked short sales.
In explaining the DTCC’s role in these matters, Thompson rejects the claim that the NSCC’s Stock Borrow program allows the same shares to be lent over and over again, potentially creating more shares than actually exist or “phantom” shares. By Thompson’s own account, shares borrowed by the NSCC to settle naked short sales are deducted from the lending member’s DTC account and credited to the DTC account of the member to whom the shares have been sold. Therefore, those same shares become available to be re-borrowed to settle another naked short sale and, if that happens, to be re-borrowed again and again to settle a succession of naked short sales. Throughout this process, the actual short sellers may continue to fail-to-deliver the shares to cover their shorts and, as Dr. Boni’s analysis of NSCC data found, the underlying failure can age for months or even years. The process which Thompson describes is one in which shares can be borrowed and lent over and over again, introducing more shares into the market than are legally registered and issued. If any ambiguity remains, Thompson can clarify it by responding to the following query: Once a share that has been borrowed through the NSCC Stock Borrow program is delivered to the purchaser, is that share restricted in any way so it cannot be lent again?
It is important to note that the Stock Borrow program is used when continuous net settlement cannot locate the shares to settle. As a consequence, Stock Borrow is usually called into play when there are relatively few shares available for borrowing. These are propitious conditions for market manipulation: Unscrupulous short sellers undertake large-scale naked short sales involving stocks for which few shares are available for trading and lending, relying on the Stock Borrow program to borrow the limited available shares, again and again, at sufficient levels to drive down the market price of the shares.
Thompson notes that of approximately $6 billion in outstanding failures-to-deliver existing on any day, “the Stock Borrow program is able to resolve about $1.1 billion … or about 20% [18 percent] of the total fail obligation.” In this statement, Thompson raises very serious questions about the integrity and operations of the NSCC and DTCC, which he can clarify by responding to the following queries: If the Stock Borrow program “resolves” only 18 percent of total fails, what is the disposition of the remaining 82 percent of outstanding fails? When failures-to-deliver occur that are not resolved through Stock Borrow, does the NSCC credit the undelivered shares to the member representing the buyer, creating genuine “phantom shares”? Finally, how many shares do the borrowing brokers, clearing firms and other participants in the Stock Borrow program owe the NSCC on a typical day, and what is their total value?
In a related matter, Thompson tries to distance the DTCC from charges that shares held in restricted accounts – for example, cash accounts, retirement accounts and many institutional accounts – are improperly lent through the Stock Borrow program by claiming that responsibility for segregating restricted shares from lendable shares falls to the “broker and bank members” of the DTCC, while responsibility for monitoring or regulating their performance in this matter falls to the stock exchanges and the SEC. As a trust company, the DTCC cannot hold that it has no role, duty or responsibility to ensure the probity of its operations. Thompson could address this issue by responding to the following queries: What procedures does the NSCC have to ensure that shares held in members’ accounts for possible loan through the NSCC Stock Borrow program are unencumbered by regulatory or legal restrictions from being pledged or assigned and eligible to be borrowed? On any given day, how many participants in the Stock Borrow program have lent shares that exceed their lendable shares, in what numbers and of what value?
Thompson also tries to distance the DTCC as far as possible from the naked short selling that generates most of the extended failures-to-deliver: “We don’t have any power or legal authority to regulate or stop short selling, naked or otherwise. We also have no power to force member firms to close out or resolve fails to deliver … we don’t even see whether a sale is short or not.” In fact, the DTCC chooses to not distinguish short sales from long sales, chooses to not regulate or stop extended naked short sales, and chooses to not force member firms to resolve protracted naked short sales.
First, Regulation SHO requires that all transactions be clearly marked short or long. If the DTCC and NSCC do not know whether sales are short or long as Thompson contends, they choose to not know. Second, the NSCC has a clear responsibility and adequate means to stop naked short sales of extended duration, with no legal barrier that would prevent them from so doing. As a trust company with an acknowledged duty to provide investors certainty in the settlement and clearance of equity transactions, the DTCC chose to carry out that duty by assuming the role of counterparty to both sides of every equity transaction, through the operations of the NSCC’s CNS system and the Stock Borrow program. By allowing short sellers to fail-to-deliver shares for months or even years, the NSCC clearly fails to provide certainty in settlement to the buyers, sellers and issuers of securities. Since it is widely known that extended naked short sales have been used to manipulate stock prices in cases of death-spiral financing, and the NSCC created the Stock Borrow program to address failures-to-deliver that prominently include naked short sales, the NSCC and DTCC share a responsibility with the SEC and the stock exchanges to protect investors by resolving extended fails.
Third, the DTCC and NSCC have the clear capacity to force member firms to resolve the extended failures-to-deliver of their customers by purchasing shares on the open market and deducting the cost from the member’s account. A 2003 study by Dr. Richard Evans and others provides evidence that forced buy-ins by any party occur very rarely. They found that a major options market maker who failed to deliver all or a portion of shares sold in 69,063 transactions in 1998-1999 was bought-in only 86 times or barely one-tenth of 1 percent of the fails. Thompson can clarify investors’ understanding of their operations by responding to the following query: What proportion of shares that are persistent fails-to-deliver, of one month or longer, are ever bought in?
Thompson acknowledges that the DTCC and NSCC know precisely how many failures-to-deliver exist for each stock and the precise duration of each of these fails. Yet, the DTCC refuses to disclose this information even to the issuer of the stock in question, which Thompson justifies by citing “NSCC rules” prohibiting such a release of data based on “the obvious reason that the trading data we receive could be used to manipulate the market, as well as reveal trading patterns of individual firms.” This response is both disingenuous and revealing. We know now, for the first time, that the DTCC has full knowledge of the extent of protracted, large-scale naked short sales in all particular cases. We also know now that the DTCC has had this information for at least a decade, since Thompson also notes that “fails, as a percentage of total trading, hasn’t changed in the last 10 years.” Yet, based on the DTCC’s own rules, it allowed these abuses to persist and fester. The DTCC and NSCC can change their rules at any time. Moreover, in this case, those rules are unjustified. Data documenting outstanding short sales in each stock are currently issued publicly, so further data on how many of those short sales are naked would not reveal additional information about the trading patterns of individual firms or in any way empower manipulators. In fact, the DTCC could substantially disarm manipulators by both publicly reporting naked short sales in each issue and pledging to force buy-ins of all naked short sales that persist for more than a limited period.
Surely, if large-scale, extended naked short sales have effectively created “phantom” shares, companies have a responsibility to their shareholders and the right to secure this information from the organization which manages the settlement of short sales. At a minimum, the DTCC should respond to requests by issuers for data on extended failures-to-deliver in their own stocks, both in the past and currently, so they can take steps to resist stock manipulators or bring them to account for past manipulation.
Thompson also claims that the DTCC did not create or manage the Stock Borrow program to serve its own financial interest, insisting that the service generates less than $2 million a year in direct fees to the DTCC and that all DTCC services are priced on a “not for profit” basis that seeks to match revenues with expenses. Without further information, these responses beg the question of whose private financial interest has been served by the Stock Borrow program, especially as the DTCC is owned by the stock markets, clearinghouses, brokerage and banking institutions that use its services. Thompson and the DTCC can clarify this serious matter by responding to the following queries: Do DTCC participant/owners receive interest or other payments through or from the Stock Borrow program for lending the shares of their customers and, if so, how much have they received for these activities over the last 10 years? Further, do DTCC participant/owners receive any dividend, interest or other payments or distributions from the DTCC or its subsidiaries?, Shapiro concluded.
In a recent editorial, Investrend Information head Gayle Essary questioned whether the board and principal shareholders would “be party to shenanigans that lead to the censorship or disabling of any media” that he says is “un-American activity.”
The DTCC’s letter to Investrend’s counsel, Marshal Shichtman, Esq., is posted at http://www.investrend.com/Admin/Topics/Articles/Resources/349_1113403487.pdf
Essary said that the arrogance the DTCC expressed in its censorship efforts shows that the entity has “become too large, too encompassing, too powerful, too unresponsive to those it serves, primarily the investing public, and too unresponsive to the Congress under whose auspices it should be operating.
“First, it is time to unconflict it, with real public representations on its board,” he said, and second, “it is time to break it up, with its various duties provided by smaller agencies under separate unconflicted boards.”
DTCC board members include Michael C. Bodson, Managing Director, Morgan Stanley (NYSE: MWD); Gary Bullock, Global Head of Logistics, Infrastructure, UBS Investment Bank (NYSE: UBS); Stephen P. Casper, Managing Director and Chief Operating Officer, Fischer Francis Trees & Watts, Inc.; Jill M. Considine,Chairman, President & Chief Executive Officer, The Depository Trust & Clearing Corporation (DTCC);
Also, Paul F. Costello, President, Business Services Group, Wachovia Securities (NYSE: WB); John W. Cummings, Senior Vice President & Head of Global Technology & Services, Merrill Lynch & Co. (NYSE: MER); Donald F. Donahue, Chief Operating Officer, The Depository Trust & Clearing Corporation (DTCC); Norman Eaker, General Partner, Edward Jones; George Hrabovsky, President, Alliance Global Investors Service; Catherine R. Kinney, President and Co-Chief Operating Officer, New York Stock Exchange; Thomas J. McCrossan, Executive Vice President, State Street Corporation (NYSE: STT); Bradley Abelow, Managing Director, Goldman Sachs (NYSE: GS); Jonathan E. Beyman, Chief Information Officer, Lehman Brothers (NYSE: LEH); and Frank J. Bisignano, Chief Administrative Officer and Senior Executive Vice President, Citigroup / Solomon Smith Barney's Corporate Investment Bank (NYSE: C), Eileen K. Murray, Managing Director, Credit Suisse First Boston (NYSE: CSR); James P. Palermo, Vice Chairman, Mellon Financial Corporation (NYSE: MEL); Thomas J. Perna, Senior Executive Vice President, Financial Companies Services Sector of The Bank of New York (NYSE: BNY); Ronald Purpora, Chief Executive Officer, Garban LLC; Douglas Shulman, President, Regulatory Services and Operations, NASD; and Thompson M. Swayne, Executive Vice President, JPMorgan Chase (NYSE: JPM).
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http://www.investrend.com/articles/article.asp?analystId=0&id=16182&topicId=160&level=16...
LMAO - did you see that van?
Old white Westphalia with rust trim!!!
Idiots?
Like puddinhead and the other one?
EVER WONDER WHAT'S GOING ON?
A lot of my Christian Traders friends have been asking me what I think is happening with CMKX. Here is what I believe is going on right now. It is only that, my opinion. It is not meant as fact, insider knowledge, or anything other than that.
I think CMKX has been naked shorted into the trillions. "Shorty" (be it market maker, hedge fund or offshore interests, or a combination) thought that he could drive CMKX out of business and never have to settle their short position as they forced CMKX into bankruptcy. It didn't happen because we have the goods; and we have an unrelenting shareholder base, who believes in the company and investigates every avenue involved.
That whole story has been speculated, investigated, and theorized ad infinitum, so I won't detail it here. But we have finally arrived at an impasse that needs to be broken. The "breaking" began when CMKX forced a reluctant SEC to act with the Form 15a. Why was the SEC reluctant to deal with the CMKX mess? Because they knew it was naked shorted beyond imagination and that settlement was going to be, at best, crippling to the market. And they knew that there was going to be egg on their face, as well as on the DTCC and the "system" as a whole. How do we know that the SEC was aware of the naked short and the impact? Because they have just told us that they knew, in announcing that they were in possession of information and data that is part of an ongoing "law enfocement", active investigation. And information they are withholding is apparently too sensitive for shareholders or their attorney to view. That alone tell us that the "known" is far more sensitive than a "failure to file". So, how do we know that the information isn't about an ongoing criminal investigation of Urban and the company? Because the investigative agency wouldn't have permitted the SEC to open a "can of worms" with the hearing. The investigation would have gone on quietly until presented to a Federal Grand Jury, to consider indictments. IMO the "law enforcement" is the culmination of the Department of Justice "sting" investigation that has been "rumored" for months to have been going after the naked shorting culprits with CMKX as the vehicle of the "sting".
I believe that now the DOJ is "on their own" to pursue the criminal aspects of this investigation, and we are on our own to pursue the civil remedies for what was done to the company. This is the reason that we have seen Maheu on the outside of this company since at least 2003 when his right hand man, Kevin T Ryan bought Crystalix and began working with Woodward and Dhonau. Crystalix is the company that Urban has been loaing money to. Now Maheu has been brought in officially to handle the "dirty work" of getting this mess settled. And he is "hot" after them.
The officials at the SEC and the DTCC have been aware of the problems for some time, but have failed month after month to take any action. That is why the Form 15 was filed, to force the SEC to finally act.
Now with the SEC actively involved and being forced to take additional action, the DTCC and the Market Makers have finally come to the bargaining table, and I believe, that a settlement agreement has already been reached, or is very near completion. They have to, or face the wrath of the public and the enforcement actions of the SEC, when Bill Frizzell files our responses and proofs on the NS next week. It would be better to "buy us off" than to have to go through that. It would be an embarassment to the Administration, the SEC, the DTCC and hopefully more than an embarassment to the perpetrators.
If we accept a settlement that "makes CMKX go away", is that the end? No the criminal prosections are still coming.
How much will we get and when? Both unknowns and I won't even speculate. But it would sure make sense to get things done before either Frizzell proves the NS, or the company reports share structure and valuation. Those are the two big things that could be killers to "shorty" and the MM's / DTCC and bring this thing to a glaring public light. They don't want that. But won't the criminal prosecutions shine the light on this thing? Yes, some light, but criminal prosecutions can be "directed", whereas media publicity tends to be exteme and not as "contorollable" as a criminal prosecution. When the media works properly, the sky is the limit on questions of fault. Criminal investigations can be "surgical" in scope and zero in on one or two particularly "dirty" perps.
As far as an amount of settlement, I think it would have to be "punitive". Shareholders who have been in this thing for awhile, and know the huge potential of CMKX, will not settle for the simple return of their investment and commission fees, as compensation. Nor should they.
Why are the brokerages getting so "testy" with shareholders. I think they are complicit, and know the end is near and time to "ante" up.. "Markers" didn't get into our accounts without the knowledge of the brokers. They knew there was a naked short, by at least the time the divies were divided up and there weren't enough to go around. They have been making up stories and excuses ever since, misleading their shareholders, and even recently eliminating the "free trading" of the stock. However, brokers who have heavily invested in the Market Makers, (like Ameritrade and Knight) have other reasons to be complicit, at least in the "cover up". They are going to lose money and lose "big time".
What about pulling certs? That is the big question on all of the boards right now. I personally took over half of my CMKX in certs and left the other half in electronic, in order to have security and peace of mind that whichever way this thing goes, I will be ready. And for the same reason, I have also taken all of my restricted divies in cert form. Many have posted their reasons for why it makes sense to pull certs or not. I think the most comprehensive posting on this matter was put out by Dr D this weekend, and we can all learn a great deal from his investing wisdom.
What does concern me, is that some are using the divy issue to divide us, just like they did the Owners' Group issue. There is no need for division, it is as simple as each person weighing the good and the bad, the possible and the probable, and making your own decision on what makes sense to you.
In summary, I think the company has reached a settlement agreement with at least the majority of the MM's and the DTCC, if not all. I think we are seeing the results of this in the confusion within the brokerages. I believe we will we be seeing more "results" of this as we near the deadlines for filing our responses with the hearing judge. So to my friends, I say, "Think this thing through before you act." Understand what is happening when it does happen. Don't make rash decisions. Pray. Seek counsel from those you have come to trust over the months or years. Know your "stewardship" responsibilities. "Now is the time" How do I know? My wife was asking that this morning and I explained: When you are standing on the edge of a lake, and see ripples coming ashore. You may have not seen the source, but you know for a fact that something has applied pressure to the surface.
God Bless
Jim
http://cmkxdiamond.proboards32.com/index.cgi?board=general&action=display&thread=1118885524
We're rocking ...
June 14th
http://www.cmkxownersgroup.com/BillsResponsetoAmeritradeLetter.pdf
Get yourself a coffee and take a break.
For those who understand what they read, try this ...
In July of 2002, the short interest in NovaStar Financial (NYSE – NFI) went from basically nothing, into multiple millions, all within a period of 45 days or so. Investors at the time had no idea what was happening, as they watched the stock of a tiny MREIT go from the mid-$30’s to $20 or so – and many sold, as they were retirees who depend upon their nest eggs to support them, and REITs are typically held by conservative, risk adverse folks on fixed incomes who can’t afford big changes in their NAV. The feeling at the time was that somebody must know something, insiders or institutions had to be selling, and that some crisis or calamity was looming on the horizon.
Wrong.
It was a network of short sellers that specialize in terrorizing small cap company investors, who had put NFI into play, to scare the widows out of their money, expecting to cover in the single digits.
That isn’t exactly how it played out.
This July marks the third straight year that these shorts have called every aspect of the company’s fundamentals wrong. They called the biggest increase in US housing history wrong, they called the company’s business strategy wrong, they called its prospects wrong, they called its growth potential wrong….every possible area, they got wrong.
The average 2002 shorts can be calculated to be roughly $25 or so, pre-split. That is $12.50 or so now, post split, and approximately 4.4 million shares post split. Those original shorted shares have paid out about $12 in dividends since then as well, meaning that even if the company went to $0, they would never make a dime in short sale profits – the math is impossible to reconcile any other way. Additionally, those shares have paid to be borrowed for 3 years, and have also paid for any margin lending costs – all in all an extraordinarily bad bet, as the costs are likely at least another $4 or $5 per share.
Through it all, the company’s detractors (the shorts, Herb Greenberg, and then a particularly ill-informed Forbes writer, as well as the WSJ’s C-section writers, and later Camelback) have gotten all the fundamentals wrong. They have ignored the MREIT truism that every company configured as an MREIT must obey – you pay out all your cash as a dividend, so you are always raising money via secondaries and preferreds and the like to fund growth – they all do it. Every one. They have to – it’s the business model. And yet all these detractors have studiously ignored that easily verifiable fact. They have also ignored the tax code’s requirement that MREITs pay out their dividends based upon Taxable Income (TI), and instead tried to make a story out of the fact that in the early, high growth years, TI will be considerably higher than GAAP, resulting in the dividend being higher than GAAP. They erroneously say that the company pays out more than it earns, when the accurate thing to say would be that the company pays out more than GAAP, but less than TI (Taxable Income, or EARNINGS) – instead they pretend that the company didn’t “earn” that TI, or somehow banish Taxable Income from the concept of earnings – a rhetorical dishonesty that is intended to deceive the dim, and the novice investor.
They have insisted that higher rates would damage the company irreparably. They have posited that by phasing out the branches that originations would plummet. They have stated repeatedly that defaults would imminently spiral out of control. They have taken provably false positions on every possible aspect of the company’s functions, and done so with a straight face, as though through repetition the lie would become the truth. Review Mr. Cuban’s gem here at Sanity Check from Mother’s Day as an example of incorrectly categorizing the basics of the company’s operations.
3 years of this. 3 full years of one of the worst shorts I can think of – even if the company went BK tomorrow, the short has lost tens of millions.
So happy anniversary on the third year of being wrong about everything about NFI. Astoundingly, the bashers are still misstating every aspect of the company’s fundamentals and ignoring the obvious fact that they have all been wrong about every single thing they’ve ever said about the company – except for when they have predicted price drops based on short attacks or manipulation. So what have we learned?
1) The manipulators are only good at predicting their manipulations.
2) They are 100% wrong when they predict anything besides that.
That’s been the history. For 3 years. They try to spin it as though they aren’t wrong, just early, but frankly even that tired old saw is getting no airplay anymore. If one goes back and reads all of the gloomy predictions of disaster from as far back as July of 2002 on the Yahoo message boards, one will find that other than some stock movement calls, EVERY prediction involving the company’s fundamentals has been dead, completely wrong.
Wonder how many years their investors are going to accept sub-par performance, and now the involvement in a badly aged fail to deliver position, which augments the legitimate short position and in fact is an even bigger, more desperate short bet? We have over 35% of the company’s outstanding shares sold short, an additional unknown number sold short as part of the old international arbitrage failure ploy, or naked shorted by the options market makers, or the international market makers, or the specialist (apparently none of which appear on the SI), and the guys that are leading the charge on this are the gang that couldn’t shoot straight – when it comes to calling the macro, the micro, or anything about the company’s business correctly.
Congratulations, my short friends. Nicely done, well played, bravo, hat’s off to you. It is rare to have such unrestrained, deliberate consistency of outcome as you have demonstrated – one would expect at least some of the fundamental predictions to have been correct just based upon the law of averages – but tut, tut, not for you. All wrong, all the time, that’s the game. And you’ve managed to sucker in every idiot with a buck and a jones to short – billionaires and day traders alike – and get them to not only ignore how incorrect you are/have been, but even better, to parrot your incorrect spin with the sincerity of the righteous - none of that round earth nonsense for them, it's flat, dammit, it's flat...
That is the real accomplishment here. Only when big money is being lost can so much effort be invested into maintaining a fiction of this magnitude for so long.
I raise my glass in salute.
Happy Anniversary.
http://bobosrevenge.blogspot.com/
My pleasure Phrill...
Read this well researched piece of work:
Brenda Fuller
U.S. Securities & Exchange Commission
FOIA Office, Stop 0-5
6432 General Green Way
Alexandria, VA. 22312-2413
General Counsel
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0207
Re: FOIA Request by Attorney for represented shareholders of CMKM Diamonds, Inc.
Request No. 05-05834-FOIA
FREEDOM OF INFORMATION ACT APPEAL
Dear Brenda and General Counsel:
Please consider this as a formal appeal of Brenda Fuller's ruling on June 3, 2005 denying the release of information made by me under Request No. 05-05834-FOIA pursuant to 5 U.S.C. 552 (a) (6), 17 C.F.R. Sec. 200.80 (d)(5) and (6).
Facts
Appellant is an attorney representing a group of approximately 5,400 shareholders of CMKM Diamonds, Inc. (hereinafter CMKX). Appellant has been formally retained by 5,400 CMKX shareholders but the information requested is equally important to all 50,000 plus shareholders of this company.
Background
CMKM Diamonds, Inc. is a mining and exploration company that has traded on the pink sheets for several years. Due to press releases and other forms of promotion, this stock became the largest selling stock issue in numbers of shares in the history of the stock market. The shareholder base is so large no one has been able to determine the extent of it with any degree of certainty. Some projections are as low as 30,000. Some projections go as high as 70,000. This attorney's group of shareholders has undertaken the task of contacting CMKX shareholders to confirm and verify both the numbers of shareholders and their respective holdings. The information I am requesting under this FOIA request would be helpful to the shareholders in some of their efforts.
This large shareholder base has invested millions of dollars in this company's stock. The company claims to have significant value in its mineral deposits, mineral claims and joint venture projects with third parties. In 2004 sales in this stock averaged over four billion shares a day. On December 14, 2004, 41,635,715,982 shares were traded and reported through normal channels. This number did not include the trades that occurred during that time as unreported trades. My shareholders have learned that in addition to the outrageously high volume of trading, 121 billion shares were traded during a six month period in 2004 on an "ex-clearing" basis and thus were not revealed to the investing public. See "Exhibit A".
This company was once a reporting company but chose to go "non-reporting" in 2003 by the filing of a Form 15 with the SEC. Although required to do so, the SEC did not conduct an investigation or convene a hearing to determine the propriety of such filing. The investing public soon after this company went to non filing status became enamored with the stock as reports of diamonds and gold findings were released and speculative value of the one million acres of mineral claims became a topic of the internet. The one million acres surrounded proven diamond producing claims of the largest producer of diamonds in the world. Although the company was a "non-reporting" company, a prominent and respected ex-SEC enforcement attorney was hired in June of 2004. The sole purpose of his hiring according to a press release was to assure the investing public that public filing of the company's financial reports would soon occur.
In March of 2005, the SEC filed a 12(j) proceeding to revoke the registration of CMKX for the company's failure to file required financial reports. Financial reports have not been filed for 2002, 2003 and 2004. For some reason the SEC began an investigation of CMKX in 2004 (and probably before that time). We know the SEC began investigating the trading of CMKX because the shareholders learned of some "unusual" trading strategies that were being used by certain members of the NASD in 2004. The trades which had occurred "ex-clearing" were discovered when a letter was sent by Jefferies' deputy general counsel to the NASD explaining these trades. This letter was generated as a result of inquiries by the SEC to the NASD. (See Exhibit "A") Shareholders learned of this letter at the deregistration hearing being conducted by the SEC on May 10, 2005.
On May 11, 2005, a meeting was held at the SEC office in Los Angeles between myself, the company attorney and various CMKX Board members with three SEC enforcement attorneys in attendance. The purpose of the meeting was to discuss the company's belief that billions of shares of CMKX were shorted and open "fails to deliver" in this stock were rampant throughout the market place. Evidence compiled by the shareholders suggests there have been over a trillion shares of CMKX stock sold to the investing public. During this meeting I was asked by one of the SEC attorneys if I had any proof of our allegations. As we discussed the proof we had accumulated, I was also asked if I had made a request under the FOIA for the DTC's "fail to deliver" list which is purportedly given to the SEC on a daily basis as required by Regulation SHO. I confessed that I had not made such request.
The meeting I am referencing concluded with the SEC attorneys giving me an assurance that enforcement action would be taken if we could prove that naked shorting existed in CMKX stock. I can only assume this was a representation by the SEC's enforcement attorneys that they were not doing an investigation into abusive shorting of CMKX stock. This appeal is for the SEC's refusal to provide the information which I now have formally requested under the FOIA.
Authorities
Brenda Fuller (Branch Chief) has informed me by letter that my request for information is being denied under 5 U.S.C. 552 (b) (7) (A). It is the SEC's stated position that I am requesting records which were "compiled for law enforcement purposes, the release of which could reasonably be expected to interfere with enforcement activities".
The Freedom Of Information Act was created to promote the release of records and materials in the possession of federal agencies to any member of the general public unless the requested material falls within one of nine exemptions. However, if the government invokes one of the nine exemptions, the burden is on the government to justify nondisclosure. 5 U.S.C.S. 552 (a) (4) (B) The government must overcome two legal hurdles to satisfy its burden for justifying nondisclosure under exemption 7 (A) of the FOIA. First, the government must prove the existence of a concrete prospective law enforcement proceeding for which records were compiled. Second, the government must prove that the disclosure of the requested information would interfere with enforcement proceedings. To prove interference the agency must be specific as to what information is being withheld and the distinct harm that could result from its disclosure. The agency may not be conclusory or vague. Scheer v. United States Department of Justice F.Supp.2d 9; 1999 U.S.Dist. LEXIS 953. City of Chicago v. United States Department of Treasury, Bureau of Alcohol, Tobacco and Firearms 287 F.3d 628; 2002 U.S. App. LEXIS 7537
In the Scheer case, the Department of Justice conducted an internal investigation into misbehavior by a prosecutor following a trial. After the investigation was complete the opposing attorney that was victimized filed a request for the file and the Department of Justice refused to release the file. The Washington D.C. District Court ordered the release of the information and clearly discussed the two prong test I have referenced above.
In the City of case, the city was requesting information about gun sales that were routinely filed with the ATF. The City of Chicago had filed suit against certain firearms manufacturers. The Seventh Circuit Court ruled the City was entitled to the records. The ATF gave numerous examples of how these records were used in possible law enforcement actions. The Court was not persuaded that such request should exempt the ATF from disclosing this information. The Court ruled that the ATF could not point out a single concrete law enforcement proceeding that could be endangered by the release of the requested information. Like the materials requested here, what law enforcement proceeding could be endangered by the shareholder's receipt of these requested materials?
What Materials Have We Requested?
The request made by me on behalf of CMKX shareholders seeks information from you in three categories:
Category 1 and 2 We are seeking records that are provided to the SEC from the NSCC on a regular basis pursuant to Regulation SHO. Clearly these records are not compiled for any concrete prospective law enforcement proceeding. Even if such records were deemed to be procured for some law enforcement proceeding, the disclosure of these records would not interfere with any enforcement proceeding. The agency makes no assertion in its response as to what, if any, investigation is ongoing. The agency does not specify which information is being withheld and makes no showing of any distinct harm that could result from these daily reporting records. SEC enforcement attorneys implied to me in the presence of others there was no ongoing investigation into "fails to deliver" of CMKX stock. Thus we are clearly entitled to the information requested.
Category 3 We are seeking copies of inquiries that are routinely sent out by the SEC to NASD and its members. We are also seeking copies of all responses to these inquiries. Brokers/Dealers routinely respond to these requests for information. The requests are so common they have acquired the name of "Blue Sheet" requests. My shareholders learned that in deed some brokers violated trading rules and chose to trade in a fashion that escapes normal scrutiny and reporting. Since there has been no public action taken against any parties, we are left to assume there will be no enforcement action in spite of such activity. To refuse this request, the SEC must show that these records were deemed to have been procured for some concrete prospective law enforcement proceeding. These acts occurred over a year ago and were known to the SEC and the NASD at that time. The government must now state that this information was compiled for concrete prospective law enforcement proceeding. The SEC cannot simply respond that such records were for law enforcement purposes. Even if the SEC makes the assertion that such records were so compiled, the agency must show that disclosing this information at this time would interfere with enforcement proceedings at the time of this request and make a showing of the harm that might come from such disclosure. "Exhibit A" is self explanatory. The SEC has contended that although the Jefferies letter suggests an "unusual trading technique" there were no acts that lend themselves to enforcement actions. There have been no actions reported publicly against any trading firms. There is no evidence known to the company of any enforcement action being taken against any firms. Thus, the records we are requesting are clearly subject to disclosure.
Argument
The fox that guards the hen house often finds himself mired in conflict. The SEC enacted Regulation SHO to combat naked short selling and to bring public awareness to short sellers that fail to follow the mandatory close out rules. The DTCC was directed to report daily fails to deliver positions over the threshold limit to the SEC. For some bizarre purpose, the regulation as enacted publishes the names of companies that have been shorted but secrecy remains as to who the guilty financial institutions are that refuse to follow the law. This is akin to publishing the names of the rape victims, but protecting the names of the rapists.
The SEC has a new person at the helm and I watched as our President introduced him on television a few days ago. I heard the news anchors discussing the struggle between corporate rights and shareholder's rights and how Mr. Cox will try to reconcile the two. Our President has undertaken a battle to convince the public that it will be a benefit to have part of our social security funds placed in the hands of the investing public. Should we do this if we do not allow our investors to know what goes on in the market or within the DTCC and other clearing firms. Our President would be very concerned if he saw the thousands of monthly brokerage summaries that have been sent to my office which evidence serious investment in IRA and other retirement accounts. He would be most concerned if he knew the SEC was doing all it could to keep vital information from the investing public.
I would like to invoke an equitable argument here. The SEC has a mission statement of protecting the investor. In this case, this company has been allowed to draw in millions of dollars of investment without the supervision or scrutiny of the agency we all depend on to provide such scrutiny. This occurred partly because there was never any action by the SEC to question the inappropriately filed Form 15. Such was the duty of the SEC. The SEC now demands Sarbanes-Oxley compliance in all of its required reports. Sarbanes-Oxley speaks of transparency. Politicians demand openness so that the Enron and World Com fiascos will be lessons learned. Do we try to find reasons to deny these shareholders information that may help them see what went on in the market place with their stock? Or do we follow the law and open those files which seems to be so well guarded by the proverbial fox.
Payment Enclosed
I have enclosed the fee of $56.00 as you have requested in your letter. I must say I was initially disgusted that I would be asked to pay for the privilege of obtaining a rejection from you for my request. After reflection I gladly enclose the fee because your letter states that you have in fact found materials responsive to my request.
You have also stated that you have not determined if any other exemptions apply since you believed Exemption 7(A) would protect you from disclosure. You went further to state that you reserved the right to assert other exemptions if Exemption 7(A) no longer applied.
Could I ask you kindly to assert at this time any and all exemptions which you plan to assert to this request? This matter is of critical importance to thousands of innocent investors who are searching for some answers to questions they have about their stock. You certainly have the right to assert one exemption and then assert another if your decision is in error but that would not seem to be consistent with the mandates of the law regarding transparency and openness in government. Your help would be greatly appreciated by thousands of citizens wanting to review the information you possess.
Sincerely,
Bill Frizzell
Attorney for the CMKX Owners Group
Cc: John Martin
Don Stoecklein
Leslie Hakala
Chairman Chris Cox
What brings you here so often phrill?
No wonder so many companies like Overstock.com are being injured by criminal counterfeiting of their stock. The SEC appears to be complicit in preventing the injured party from investigating, as this CMKX case demonstrates. The share owners banded together to form an “Owners Group” and with the help of Atty. Bill Frizzell are challenging the SEC’s actions in a public arena. Other companies are following CMKX’s lead … Jag Media was the first.
Item 4 below is the latest letter in this saga … it’s going to be a thriller.
4 http://www.cmkxownersgroup.com/FOIOwnersGroupAppeal.pdf
3 http://www.cmkxownersgroup.com/FinalResponseFromSECForFOI.pdf
2 http://www.cmkxownersgroup.com/PreliminarySECAnswerToFOI.pdf
1 http://www.cmkxownersgroup.com/FOILetter.pdf
Now the consortium of law firms consists of O'Quinn, Laminack & Pirtle, Christian, Smith & Jewell, L.L.P., Heard, Robins, Cloud, Lubel & Greenwood, LLP and Koerner, Silberberg & Weiner, LLP. are following a parallel path to Bill Frizzel who represents the CMKX Owners Group.
JAG Media Legal Team Requests Assistance of Stockholders in Connection with Documentation of Stockholder Positions
http://tinyurl.com/cym3u
I love the way the CMKX case is developing.
Need to get me some more popcorn.
http://cmkxdiamond.proboards32.com/index.cgi?board=general&action=display&thread=1118239448
Are you in on this racket dumm1 ??
Watchit ... Zenman sez the ammo is mounting.
When you look at the list of things that have happened recently, it is all starting to add up. IMO get ready for the biggest shock to the financial markets to ever hit. HedgeGate '05 (or '06 maybe) I believe will make all other financial scandals pale in comparison.
Bennett grills Donaldson.
5 Senators (and more to join?) begin a vocal inquiry into counterfeited shares.
SEC's Cutler steps down.
SEC's Donaldson to step down.
SEC authorizes a limit of liability on all wilfull misconduct and federal securities law violations by the NSCC (subsidiary of DTC).
DTC awkwardly puts out 2 back-to-back defensive PRs claiming there is no illegal naked short selling through it
Overstock.com president puts out scathing letter re: counterfeit shares.
O'Quinn lawsuits continue.
Eagletech judge orders DTC to produce trading records.
Pink Sheets president puts out scathing letter re: counterfeit shares.
Transfer Online President puts out scathing letter condemning the DTC for its failed system.
SHO continues to fail comprehensively.
SEC nailed for failing to complete its OWN financials and for failed oversight methods in its responsibility (congressional probe to begin).
Dateline episode on NSS postponed indefinitely.
DTC ignores the First Amendment and shuts Financialwire's publishing avenues down.
Start adding it up. The biggest scandal of all-time on Wall Street is about to hit imo. The hedge funds have taken advantage of every loophole in the book to make trillions imo and the sec and dtc have sat idly by while the hedge fund industry has exploded in growth. I only hope that when this is all said and done that there is not a global meltdown from this. I hope that there will be a cushion of some sort to help the markets absorb the changes that MUST take place:
1. Get rid of the DTC.
2. Give SHO teeth.
3. Eliminate the MM system and move to an all-electronic trading system with certain controls in place.
4. Let the heads roll at the SEC.
5. Take down the guilty hedge funds.
6. Move to eliminate all pink sheet companies over time (there simply should NOT be a market for securities this unregulated).
7. Pray the financial markets survive the fallout.
How will CMKX play into this? I don't know. I do know that Maheu is probably capable of "conditioning atmospheres" as they say and, given his history, I highly doubt if any of us would EVER know what he knows or where his next moves will be. I'm just glad he's on our side of the chessboard.
Donaldson's resignation should come as no surprise. A storm is a-brewin' imo and those that see it on the radar are preparing for it. Remember how insider selling can often reveal problems well in advance of market knowledge. Well, take a gander at the exodus going on at the SEC ...
You can't beat this for great news.
Donaldson resigning from the SEC.
Annette Nazareth should be next.
http://quote.bloomberg.com/apps/news?pid=10000006&sid=aICpA9SdMP6U&refer=home
Congress Addresses Naked Shorting; Seek SEC Terminations and talks of Market Collapses – May 30, 2005
David Patch
Has naked shorting become so widespread that the Wall Street system could collapse? Is it time that folks at the Securities and Exchange Commission were given their walking papers? These are just a few of the latest eye raising possibilities members of Congress are stating in memos drafted to constituents concerned about Naked Short Selling abuses.
South Carolina Congressman Joe Wilson stated in a May 19, 2005 memo to constituent B. Moody “It is believed that if only a few instances of this practice [naked shorting] would occur, the market could handle such losses. But if the practice is widely used and major losses take place, the system could be in dangerous collapse.”
Now consider Regulation SHO, the timeline to this regulatory change, and some of the controversial policies and you start to wonder about the magnitude of the problem.
The SEC approved Regulation SHO in June 2004 but provided a 6-month window of opportunity for Wall Street to come in compliance with the new rules. The date for compliance was January 3, 2005. SHO rules, while new to the SEC, were only a duplication of pre-existing rules at the SRO level. The only addition to prior Wall Street regulations is a controversial “grandfather” clause.
The SEC, after providing 6-months to clean up the books slowly, without imposing harm to the members, demonstrated a concern that 6-months would not be adequate to settle the magnitude of open fails. The SEC indoctrinated a “grandfather clause” into the June 2004 release that essentially pardoned all of the “large pre-existing fails” from mandatory close-out provisions. It must be understood that by law all trades are to settle within 3-days with only minor exceptions. In this particular case, the 6-months to clean up the problem was too short.
It is therefore theorized that as Congressman Wilson pointed out, the problem is of a magnitude great enough to cause a possible collapse of the system. If it were not so pervasive, the SEC would not have had to illegally pardon past fraud to protect only minor losses. Since the SEC had no means of separating out the magnitude of companies affected, they had to create a blanket pardon to all abusers. Wall Street abusers! In doing so, the SEC sacrificed businesses and investors.
A similar response by Missouri Senator James Talent, speaking on the quality of the SEC management in a memo about naked shorting, only further explained the situation at hand. “What Enron did was clearly illegal; several different government agencies had the power to prevent it but failed to do so. As far as I know, no one in the government was held accountable for this failure.” Further stating “In other words, firing a few people at the SEC will light a fire under law enforcement more than hundreds of pages of new regulations.”
If the firings are to take place, I already have my wish list drafted.
In all, Senator’s Bennett, Shelby, Sarbanes, Talent, and Collins have all questioned the SEC on naked shorting that we are aware of. Representatives Baker, Frank, Tierney, Wilson, and others have done the same from the House Branch of Congress. Ironically, with all these states being represented, and members of the Senate Banking Committee [Shelby, Sarbanes, and Bennett] and House Financial Services Committee [Baker and Frank] seeking answers, why has there been a lack of congressional hearings over this? Where is the accountability of Government Senator Talent mentioned?
The Securities and Exchange Commission, under the helm of former Wall Street giant William Donaldson, created laws that violated the rights of the investor and violated the guidelines handed down to the SEC by Congress. They did so secretively and with willful neglect of their duties. They cheated the investor to protect the wealth of the criminals.
The SEC was caught misleading Senators inquiring about what was happening and maliciously attacked those that spoke out against their actions. Annette Nazareth, Director of the SEC’s Division of Market Regulation mocked the abused as she protected the giants of Wall Street. A systemic problem not only exists but, according to the General Counsel of Bear Stearns, the regulators have known about this problem for years and have ignored it. Regulators looked the other way because it was in the interests of Wall Street.
Bear Stearns General Counsel: “To give you that brief introduction in Reg SHO, the history how we got to where we are today. For the past several years we have been hearing from many different regulators regarding their concerns about the increase in the level of fails that they are seeing. They believe, and they have stated on numerous occasions, that one of the primary causes of the high level of fails was that various participants in the short sale process, prime brokers, executing brokers, clients, were not following already established rules.”
Is the problem about one or two companies or is it systemic? Certainly recent enforcement actions would indicate it is systemic. Certainly having over 20 companies entrenched on the SHO “threshold list” for 100 consecutive trading days is more than simply isolated. These companies are not unknowns; they are your Delta Airlines, Martha Stewart Living, Netflix, Taser, Global Crossing, Krispy Kreme, and others. The SEC is allowing the manipulators to walk away from the manipulation because it is in the best interest of……?
Congressman Wilson stated that the markets could handle the losses if only a few companies were involved. Today, the markets are not taking any losses as the SEC has pardoned their illegal trading. The SEC has bought the violator’s time to recover gracefully from the “raid” they committed on unsuspecting shareholders. The SEC gave Wall Street a bazooka and gave the shareholders slingshots. It truly is a David vs. Goliath story with the Federal Government arming Goliath.
Ironically, as Senators and Representatives begin to see the light, it is the Senate Banking Committee Chairman Richard Shelby that continues to deny the existence of a problem.
In a memo to me dated May 24, 2005 the Senator stated “Currently, securities regulators are conducting investigations to thoroughly examine naked short selling practices.” In reality, the SEC and NASD created a joint task force that reviewed this practice in January of 2004. They already examined the problem. The SEC knows how pervasive naked shorting is which is why they illegally grandfathered past abuses.
The Senator went on to say “I assure you that I will continue to monitor the implementation of Regulation SHO to ensure the SEC is addressing short selling abuses.” Funny, some 20+ NYSE and NASDAQ listed securities have been a threshold security for 100 consecutive trade days and nobody seems to have a problem with that? These companies trade their entire public floats over and over, drop 50+ percent in market cap, and the fails cannot be closed. Somebody is benefiting from those settlement failures and it is not the shareholder. Maybe Senator Shelby can check into the trade details and understand who owns the fails in these and other companies. Certainly that would be a better monitor than asking the rogue agency what is going on.
Finally, the Senator closes out the memo claiming that “The Senate Banking Committee remains committed to working closely with regulators and market participants to ensure sound business practices in our capital markets.” Missing from this statement are the investors. While investors are the ones frequently violated the Senate is working closely with a poorly committed Government agency [SEC] and the Wall Street crooks who consistently deny us fair markets. Sounds logical. Wall Street does heavily finance Congress. Some inside the beltway claim that the power of Wall Street has already stopped any and all open public hearings on this matter. Committed?
All of these memo’s can be found at www.investigatethesec.com in the media links section under the heading; Congress writes the SEC and responses.
The only other open question on this issue – Where is Dateline NBC and their “exclusive story”?
For more on this issue please visit the Host site at www.investigatethesec.com
Copyright 2005
For those who haven’t seen it, here's Laurie Livingston's letter she sent the SEC more than a year ago - March of 2003 -
http://www.sec.gov/rules/sro/dtc200302/transfer030603.txt
From: Lori Livingston [lori@transferonline.com]
Sent: Thursday, March 06, 2003 4:44 PM
To: rule-comments@sec.gov
Subject: FIle No. SR-DTC-2003-03
I am writing these comments to the Depository Trust Company’s (“DTC’s”) proposed rule change that appeared in the February 21st issue of the Federal Register. My comments represent several viewpoints but primarily I respond in the following capacities:
I am the President of Transfer Online, Inc, and act as the transfer agent for (Nutek, Inc.) one of the Issuers who expressed their desire to withdraw from the DTC system but were denied. Transfer Online also serves as the transfer agent to several other companies who have inquired about the possibility of withdrawing from the DTC system and finally, I am an experienced member of the financial services industry for the past 20 years where I have specialized in transfer agent and back office services.
As a transfer agent involved in this process I have direct experience of the situation(s) leading to DTC’ s request. While acting on the behalf of Nutek, Inc. to notify DTC of their intent to withdraw, Transfer Online was initially told that the request was received and in process. No indication was given that this request to withdraw was a problem until approximately 6 weeks later when we were made aware that DTC’s position had changed. Transfer Online was told that if Nutek, Inc. shares were not transferred into their nominee name, "Cede & Co", Transfer Online would be in violation of the operational agreement between our two companies and that we would be held accountable.
This put Transfer Online between the Issuer’s request (on whose behalf we act) and DTC’s demand and so we inquired to the S.E.C as to what, or if, any legal or statutory obligations existed to either party which superceded our agreement to act as agent for the Issuer. The S.E.C was unable to issue guidance in this matter so having no idea what “being held accountable” would mean to Transfer Online, and having received several phone calls from DTC requesting to know my position and what my intentions were, I suggested to the Issuer that until such time they were prepared to handle any potential legal issues with an entity as large as The Depository Trust Company that they let the shares be processed as usual.
Many Issuers have come forward with their opinions and interest in joining the exodus from DTC. They are frustrated by dramatic unexplained price movements, confounded when in a single day, in companies with a high percentage of shares held by insiders, more than the number of shares outstanding for their company are traded, and they are frustrated by their inability to access the information they need to determine the cause. The company is essentially cutoff from the majority of stock transactions that take place behind the closed doors of DTC in book entry movements of shares. Should the Issuer request information it is only available to them at the prices that are determined by DTC.
Transfer agents, while able to provide transaction history which happens when stock certificates are involved, cannot provide the information from DTC because we do not have access to the majority of the shareholder records as they sit on our books as one large position in the name of Cede & Co. that seldom changes. This leaves an Issuer powerless to research the trading of their own stock, communicate with the shareholders or take action against those who might be harming their company with questionable even perhaps illegal trading practices.
In regard to DTC's proposed rule change that states, "DTC will only honor the requests of the participants", I feel compelled to point out that the participants of DTC are ultimately only holding shares for the benefit of their customers who are in fact the shareholders of the company. Almost daily, particularly when an Issuer is attempting to have their shareholders pull their shares from street name and obtain certificates, Transfer Online receives phone calls from shareholders who tell us that their broker told them they cannot have a stock certificate, or that the transfer agent will charge you $75 - $100 dollars for a certificate, or the transfer agent won't issue the shares. How can a shareholder get a stock certificate if their broker (or the participant) is the obstacle? If, as DTC states only the participant's request will be honored, and the participant will not honor the request of the beneficial owner, then ultimately the share holder has no right to their own property nor the ability to do what the Issuer has determined is in the companies best interest.
My experience over the years suggests that shareholders are seldom fully advised of the different types of ownership they can have, or of the full implications of holding shares in street name. Requesting certificates is always riddled with obstacles to deter this form of ownership.
Like many of the Issuers seeking withdrawal from DTC, I have often been suspicious of oversold stock. When tabulating shares for a Proxy Vote oftentimes there will be more shares voted by the brokers than there are shares outstanding in the company. When the question is raised with ADP (another representative of participants) their response is that they simply report what the brokers tell them they have. Why are brokers reporting more shares than they could possibly hold and why is it the obligation of the company or its agent to research why the numbers are wrong at their expense?
DTC’s solution has been the development of the Direct Registration System (DRS). This allows a shareholder to hold their shares in their own name on the books of the corporation while still in the DTC system attached to a particular participant or brokerage account. This allows for direct ownership on the books of the company, while allowing the broker to retain control of the account by remaining attached to the account in case of sale.
There is a problem with this system as there are many Issuers, and some transfer agents, that cannot meet the requirements that are set by DTC nor can they afford to participate in the DTC FAST system because once an Issuer enters into the FAST system, DTC will no longer pay fees for any activity they request and the Issuer then becomes responsible for those fees. Since those very same fees were paid for services by DTC when stock is in physical form, it is difficult to comprehend why this is the case when there are no certificates. Ultimately, the result is that the Issuer is excluded from FAST and DRS, as are their investors. As in any case where a company holds a monopoly you have to play by their rules or you don’t play at all.
The financial burden on a small company is tremendous and very few small companies are able to participate. Those who do not are excluded from DRS and thus have no access to their shareholder records unless the shareholder holds the shares on the books of the company. The entire system has been designed for larger companies who do not think twice about spending great deals of money on their transfer agent fees, but smaller corporations who don't have the resources and consequently cannot afford to participate use withdrawing from DTC as their only method of having some control over their shareholder records.
What will happen as the industry moves toward immobilization and same day settlement? What will happen to those companies that cannot participate and have no access to their stock activity? DTC stated in their proposal that they have “discussed the substance for this proposed rule change with various DTC participants and industry groups and received favorable reaction.” I suggest that many were excluded from this conversation that has a great deal at stake. There is more than one way for the prompt and accurate settlement of securities transactions to occur and also preserve the integrity of the Issuers shareholders records. Presently, all solutions are based on a system where DTC is basically taking on the role of transfer agent as well as being an organization for and by the brokers. Over the years I have watched most companies move from majority of ownership held on their records toward a situation where over half the shares are held as registered to Cede & Co. and these shares usually represents 3-4 times the number of shareholders that appear on the records of the company.
I think the rule change should not be approved until a sufficient amount of time is put into investigating the complaints of the Issuers and time is spent looking at the existing system in general.
Letter to SEC: Elimination of Stock Certificates
by Lori Livingston
From: Lori Livingston
Sent: Friday, May
27, 2005 3:26 PMTo: chairmanoffice@sec.gov; marketreg@sec.govSubject:
Elimination of Stock Certificates
To whom it may concern:
I am writing in regard to the recent press release from the Depository Trust Company (DTC) and other recent events and rules regarding DTC eligibility and Issuer rights in regard to DTC participation.
As someone who has been in the transfer agent business for 23 years, I am alarmed by recent developments and trends that all work toward a system of increasing positions on the books and records of corporations in the name of Cede & Co. (nominee name for DTC). As the transfer agent for approximately 300 issuers, I am increasingly contacted by these companies as they seek information regarding the stock ownership in their companies and the underlying trading of those shares in the market. Over the years as the amount of shares held at DTC has increased it has become more and more difficult to determine who owns the shares, who is trading them and if the trading is proper. This trend, and the resulting problems I will detail below, continues to increase because a minority of the total number of shareholders are reflected on the books and records of the corporation, most activity takes place behind the wall of ownership that is designated as Cede & Co. and neither the company nor the transfer agent has any access to the underlying information.
While the press release (which I have attached) heralds the movement toward increasing this trend of dematerialization as a triumph and great progress which will save investors millions of dollars, I see this trend from a different perspective and one which is not only alarming to me but to many of the companies that will be effected by these changes. I also disagree as to whether or not it will save shareholders millions of dollars or merely shift the costs through a different route and into different pockets. Additionally, I see this as continuing the trend of increasing costs to corporations, particularly smaller issuers already struggling with the ever increasing price of being a public company, and further decreased shareholder value based on the additional expense paid by the company.
Furthermore, DTC recently managed to put through a rule change (Release No. 34-50758A; File No.S7-24-04) that prohibits a transfer agent from representing any company who seeks to withdraw from the DTC system. This change effectively leaves companies with no voice or choice in the management of their stock and their ability to have any transparency as to what is actually taking place in the market in regard to their stock.
I receive calls from companies seeking information as they watch millions of shares trade in a single day, who watch their share price decrease in value and who have no access to information regarding who is behind the trading of these shares, or if in fact the trades are at all legitimate. As the system now operates, most companies have a large percentage of shares on their books registered to Cede & Co. This position usually represents a majority of the outstanding stock in any given company. Underlying this position is a system at DTC which is reflected in a Position Listing Reportand this report represents the brokers and clearing firms that hold positions in any given security on DTCs books and records for the beneficial owners (Non Objecting Beneficial Owners NOBOs and Objecting Beneficial Owners OBOs) or shareholders. The trades that take place on a daily basis move between these brokers and clearing firms electronically; however, the Issuer (nor their transfer agent) has any access to this data unless they order and pay for the lists. This is not only expensive for the company, but it also does not tell them anything about who actually owns the stock. For that information they must go to yet another party and that is ADP.
ADP is engaged by the brokers to keep track of the NOBOs and OBOs and to send the shareholders in Street Namereports and communications from the Issuer. Their other vital function is to serve as proxy tabulator for the shareholders who hold their shares in broker accounts. This is a critical function for the public company and one which they are required to perform by law. Given the importance of shareholder voting and communication one would assume that the same requirements placed on transfer agents as to accuracy and reporting would be placed on ADP and Cede & Co. as they usually hold or service the majority of the shares owned in any given company. I have found; however, that when presented with the tabulation reports from ADP the share totals they report sometimes exceed the total number of shares outstanding for the company. Let me restate this because it is a very important part of my concern about a system that is more and more headed in the direction of increased control by DTC. The shares presented by ADP, that are the shares voted by the brokers on behalf of the shareholders for whom they hold accounts, EXCEED when added to the shareholders of record the total number of shares outstanding. As the final judge and inspector of elections I would naturally inquire as to how the number of shares could be higher than the total shares that exist for a company and to my surprise I am told by ADP that they only vote what is reported by the brokers. It becomes the responsibility of the company, and further the transfer agent, to reconcile the numbers so that an annual meeting can be conducted that reflects numbers of share voted that makes any sense.
Where are these extra shares coming from? Why are there no controls on the number of shares held in the nominee name Cede & Co. vs. the ownership on the books and records of the brokers and why is the company not privy to any information unless it pays whatever fees it is told it must pay by the organizations that control the data? There have been a great deal of new regulatory levels of reporting put on companies (i.e. Sarbanes- Oxley Act compliance), but from where I am positioned in the marketplace that does not address what is a far greater problem for issuers shareholders and the integrity of the markets, and that is, who are their shareholders and how are their shares trading?
I will close at this point with a request to the SEC that in the rush to move to dematerialization someone look at the existing system and the inequities that exist in the market based on a companies complete ignorance and inability to know what is actually going on with the shares of their companies and the problems we face in the future as we move toward a system where the brokers, DTC and ADP have more information and control than the shareholders, the transfer agents and the issuers. In fact, as the system is evolving, DTC is de facto becoming the largest transfer agent in the industry even though it is an organization formed by and working for the interests of the brokerage community. If, ultimately, the S.E.C. is in place to protect investors then this issue can not be ignored because in the end when the market is completely under the control of the brokers and
the organizations that represent them then the market can neither be
transparent nor fair.
I thank you for your time in reading this communication.
Lori Livingston
President & CEO
Transfer Online, Inc.
317 SW Alder St., Second Fl
Portland OR 97204
Chop off her head!
Nazareth's head should roll.
May 31, 2005 (FinancialWire) May 31, 2005 (FinancialWire) U.S. Senator James M. Talent (R-MO), the Deputy Majority Whip, in joining four other Senate leaders on both sides of the aisle to question the effectiveness of Regulation “SHO,” has taken his concerns a step further, suggesting that heads should roll at the U.S. Securities and Exchange Commission.
Whether he was aiming his salvo at Annette Nazareth, head of market regulation who is being trumpeted for a seat on the Commission by Senator Charles Schumer (D-NY), is unknown, but Nazareth has been the most vocal about the validity of complaints about illegal naked short-selling, suggesting that aggrieved holders in heavily shorted and “unsettled” stocks such as General Motors (NYSE: GM), Kerr-McGee Corp. (NYSE: KMG), Elan Corp. (NYSE: ELN) and Delta Air Lines (NYSE: DAL) are simply “people who want their stock to go up.”
Being fired from the SEC would not help the resume of any person whose ambition is to go on the Commission itself.
“I would hold the various enforcement officers accountable for preventing illegal activity. In other words, firing a few people at the SEC will light a fire under law enforcement more than hundreds of pages of new regulations,” said Senator Talent in joining U.S. Senators Richard Shelby (D-AL), Susan Colins (R-ME), Robert Bennett (R-UT) and Richard Durbin (D-IL) in questioning U.S. Securities and Exchange Commission Chair William Donaldson about what they call the “failure” of Regulation SHO to curtail unlawful, predatory securities trading.
The current Senate line-up carries significant heft. Senator Collins is chair of the Homeland Security and Governmental Affairs committee, Senator Shelby is chair of the Senate Banking Committee, Senator Durbin is Assistant Democratic Leader and Senator Bennett is Republican Whip. The Senators’ letters are posted at http://www.americaneedstoknow.com
“Stockgate Today” publisher David Patch said that the Senators have 23 good reasons, citing that many companies, including Martha Stewart Living Omnimedia (NYSE: MSO), Delta Air Lines (NYSE: DAL), Krispy Kreme (NYSE: KKD) and Netflix (NASDAQ: NFLX), that remain “not settled” on the official threshold lists maintained by the New York Stock Exchange and Nasdaq five months later.
“Stockgate Today” is published at http://www.investigatethesec.com . The Senators’ letters to shareholders and the SEC are posted at http://www.americaneedstoknow.com
Small investors quoted in FinancialWire and elsewhere still are unable to receive requested certificates from major U.S. brokerages, many of which have simply given up on providing rational excuses.
Patch said that most of the 23 companies hardest-hit by unlawful stock manipulations in full sight of market regulators, including those at the SEC, such as Annette Nazareth, head of market regulation, who belittles complaints as coming from those who “want to see their stock go up,” have had double-digit declines in stock valuations over the 94 days they have been on the highly-public list.
He also noted that in the March, 2005 Euromoney Magazine article on illegal naked short selling, Nazareth’s assistant, James Brigagliano said that prior lawbreakers were “grandfathered” because “we were concerned about generating volatility where there were large pre-existing open positions, and we wanted to start afresh with new regulation, not re-write history.”
“So does Ken Lay, but he can’t,” retorted Patch.
This disputed “grandfathering” has not yet been taken up by Congress, but the 23 companies on the threshhold list for the past 94 days are new transgressions, and presumably they can’t be dealt with either because Nazareth and Brigagliano are concerned about “generating volatility.”
In other words, said one critic, if your illegal actions are big enough, you don’t have to worry about being caught because you can bring down the market, or a company.
Also, in a blockbuster event almost equal to the mysterious “postponement” of the announced expose of the Depository Trust and Clearing Corp. by General Electric’s (NYSE: GE) “Dateline NBC,” the U.S. Securities and Exchange Commission has inexplicably given the DTC’s National Securities Clearing Corp. “immunity” in the form of limited liability for willful misconduct or violations of Federal securities laws.
The Notice regarding the SEC’s action is at http://www.nscc.com/impnot/notices/notice2005/a6029.pdf
These and other events, including the proposed nomination of Director of Market Regulation Annette Nazareth, who has characterized opponents of illegal market manipulation as people “who just want their stock to go up,” to become a Commissioner, is providing more and more fodder for the organizers of public demonstrations and lobbying in Washington June 6 and in New York June 7. The organizers, who are filming a documentary, say demonstrators now number over 600.
Some legal experts are questioning whether the SEC, without the approval of Congress, has the authority to limit the NSCC’s liability. There have been similar questions about the SEC’s authority to unilaterally “grandfather” securities violations prior to Regulation SHO.
The new regulation is sure to be litigated since the DTCC and the NSCC were the subject of lawsuits claiming their “stock borrow program” is illegal counterfeiting, prior to the rule approval by the SEC.
The DTCC has also admitted to interfering with the media in impacting the distribution of FinancialWire on Yahoo (NASDAQ: YHOO) and elsewhere through malicious interactions with Investors Business Daily. The “Important Notice” from the DTCC regarding the NSCC demonstrates that the entities are a “self-regulatory organization” under the auspices of the SEC, which ramps up the media interference to First Amendment violations. FinancialWire’s counsel, Marshal Shichtman, Esq., is returning to the U.S. today and will be reviewing the new evidence.
The DTCC said that the “approved changes create a uniform standard limiting NSCC’s liability to direct losses caused by the NSCC’s gross negligence, willful misconduct, or violation of Federal securities laws for which there is a private right of action.”
In addition, the organization stated, “the changes memorialize an appropriate commercial standard of care that will protect NSCC for undue liability, permit the resources of NSCC to be appropriately utilized for promoting the accurate clearance and settlement of securities, and are consistent with similar rules adopted by other self-regulatory organizations and approved by the Commission.”
The DTCC had asked for the rule December 8, 2004. It is not known how the proposed rule slipped through the cracks on the public and Congressional levels prior to the approval.
The National Coalition Against Naked Shorting stated that the action was sought and approved hastily because “they have been willfully violating securities laws for years, know that it will come out in court, and want to have a piece of paper to fall back on,” adding that it corroborates “the theory that the stock borrow program violates a host of securities laws, that the NSCC knows it, and that they have been counterfeiting stock for years and just now are starting to catch on to the idea that they will get caught.”
Nazareth was quoted in February in the New York Times (NYSE:NYT) as “doubting” that threshold companies such as Overstock (NASDAQ: OSTK), Martha Stewart Living (NYSE: MSO) or Novastar Financial (NYSE: NFI) were being “manipulated,” and that victims of illegal naked short sales are simply people who want their “stocks to go up.”
She said those who complain of their losses to illegal trading activity have an attitude that “it’s a criminal conspiracy when stocks move the wrong way, and the government should do something about it.”
“What is criminal,” said one who believes Nazareth’s appointment, so far championed by U.S. Senators Charles Schumer (D-NY) and Harry Reid (D-NV), would be disastrous for small investors who someday expect justice and a fair playing field in the markets, “is that someone could be in a position of authority at all with this kind of anti-investor attitude.”
National Counterfeit Conspiracy Days are scheduled in Washington, DC on June 6, and in New York City June 7 by a group planning a film to highlight the national financial scandal known as StockGate. Its website is http://www.counterfeitconspiracy.com
The film project, said to be a “Michael Moore”-type docudrama, is planned by Fuego Entertainment of Miami.
The group is organizing the citizen lobbying effort June 6, beginning at 11:30 a.m., in front of the U.S. Securities and Exchange Commission building, followed by lobbying on Capitol Hill.
“After we make our United Voice heard on Capitol Hill, we are headed to New York City by busloads to make that same voice known to all the world from the hub of the financial district where cameras from all over the world have a constant eye on what’s happening,” the organizers stated.
“Our busses will depart Washington D.C. on June 7th at 7:30am to head to NYC. We will be protesting on Times Square at 2 p.m. After an afternoon on Times Square we will head back to D.C.”
In other recent StockGate developments, Senator Richard Durbin has joined Senator Robert Bennett in complaining about the ineffectiveness of Regulation SHO, and a Global Links (OTC: GLKC) shareholder, Dennis Smith, was told in an email by Wells Fargo (NYSE: WFC) that it can not provide delivery of Global Links certificates because it and E*Trade Group (NYSE: ET) are hopelessly short. And the individual who started the controversy, Robert Simpson, has said he has also been unable to get delivery from Oppenheimer Holdings (NYSE: OPY).
In his communication to SEC Chair William Donaldson, Sen. Durbin also contested the claim by the Depository Trust and Clearing Corp., a unit ot the New York Stock Exchange and NASD, that it has no responsibilities under Regulation SHO.
Senator Durbin’s letter to Donaldson appears to sharply contest the Depository Trust & Clearing Corp.’s contention that it has no role in Regulation SHO.
“I am writing to request information regarding the June 23, 2004 Securities and Exchange Commission (SEC) short sale regulation, designated Regulation SHO. On March 9, 2005, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing on Regulation SHO, in which Chairman Bennett spoke with you about the regulation’s effects on the illegal practice of naked short selling. I thank you for your testimony and I hope that you can follow up on some of my concerns not fully addressed by the Banking Committee hearings.
“I appreciate the efforts of the Securities and Exchange Commission (SEC) to control abusive short selling practices. As a result of Regulation SHO, the names of firms with large amounts of unsettled shares are published on the Threshold Security List daily. This list assists individual investors in making informed decisions about potential manipulation of the market, and gives regulators and investigators a centralized list of firms with significant numbers of undelivered shares. However, it has come to my attention that Regulation SHO may not be curtailing abusive naked short selling practices.
“Several of my constituents have contacted me since the SEC introduces Regulation SHO. They have raised concerns about potential loopholes in settlement regulations. During your recent testimony before the Banking Committee, Chairman Bennett asked you about the ability of brokerage houses to shuttle unsettled shares every 13 days in order to avoid settling the borrowed shorted shares. Due to time constraints at the hearing, the committee did not receive a complete answer. This issue is worthy of a full response.
“Additionally, my constituents have expressed concern about SEC enforcement of Regulation SHO. While the Threshold Security List publicizes securities that might have been manipulated, I am concerned that some securities repeatedly appear on the list. What steps is the SEC taking to investigate trading practices that result in vast quantities of unsettled shares, and to punish those people who violate SEC naked short selling regulations? What is the SEC doing to ensure that the Depository Trust & Clearing Corporation (DTCC) is complying with Regulation SHO, and what actions does the SEC undertake when the DTCC identifies large quantities of shares that have not been delivered?
“It is important that the SEC identify abuses and prevent manipulative naked short selling practices that undermine faith in the market. Thank you for your attention to this matter. I look forward to your timely response,” Senator Durbin concluded.
Wells Fargo had written to Smith:
“The other broker/dealer who is short shares of your security is E*Trade. Though this type of activity makes it difficult to issue physical certificates, it is legal and within regulations.
“There is no definite date by which E*Trade would have to purchase the shares. In many cases, a broker/dealer will sell shares they don't hold hoping that the price will fall. If it does fall, the broker/dealer will buy the shares at that time, and deliver those newly acquired shares, making a profit. If the stock price continues to rise, the broker/dealer will eventually buy the shares and deliver them to prevent any additional losses.
“According to our trading desk, E*Trade was the only broker/dealer offering shares of GLKC yesterday. This has been the case since you originally requested your certificate. Anybody who has purchased this security in that time period has likely purchased the shares from E*Trade.
“You are free to sell the shares anytime. When E*Trade acquires shares, they would be delivered to the current owner. However, a certificate cannot be issued until the shares are actually received.
Pink Sheets head Cromwell Coulson has asked the SEC to publish short positions on all over the counter and bulletin board stocks, and that request is currently in a comment period.
The request for rulemaking, which Coulson has told companies traded on the Pink Sheets, is needed “to make regulators turn on the lights and protect investors from the menance of hidden short selling in the OTC market,” is at http://sec.gov/rules/petitions.shtml
In an email to Donaldson, Coulson had said “I believe that it is very important to require the disclosure of short positions because the lack of transparency is allowing promoters to defraud investors by blaming all selling on naked market maker short selling. Disclosure and transparency can easily remedy the issue.”
In other news on the naked short-selling front known as “StockGate,” adding to what TheStreet.com founder James Cramer calls the “Hedge Fund Relief Act,” the termination of the Uptick Rule, is the fact that those using illegal naked short selling in the past have been granted a kind of amnesty for acts before the first of 2005. The SEC just “grandfathered” those illegally-begotten gains and resultant counterfeit shares into the system, so these windfall gains are now available to downtick with reckless abandon on downticks.
The “grandfathering” admission is at http://www.sec.gov/spotlight/keyregshoissues.htm
In the same document, the SEC has inexplicably stated that not all forms of illegal naked short selling, the equivalent of counterfeiting shares in public companies, are actually “illegal.”
The DTCC actions in the StockGate mire are the most serious, if not notorious since the agent of two SROs, the New York Stock Exchange and NASD is also peopled by some 21 directors whose companies, such as Merrill Lynch & Co. (NYSE: MER), State Street Corporation (NYSE: STT) and Goldman Sachs (NYSE: GS), are unlikely to support the DTCC in what attorney Marshal Shichtman, Esq., has termed “strong-arm” tactics.
The DTCC has admitted it has engaged in an act of censorship of this newsletter in squelching its redistribution by Investors Business Daily, and via Investors Business Daily, to Yahoo Finance, a portal owned by Yahoo! (NASDAQ: YHOO), and it is a suspect in the sudden and so far unexplained “postponement” of a widely anticipated expose by Dateline NBC.
In a wide-ranging letter to the DTCC, Robert J. Shapiro has charged statements made by Larry Thompson, DTCC Deputy General Counsel, were “inaccurate or misleading,” and asked the DTCC to correct the record and respond to his comments and questions.
Shapiro is chair of Sonecon LLC, a private economic advisory firm in Washington, D.C., who served as U.S. Under Secretary of Commerce for Economic Affairs from 1998 to 2001, Vice President and co-founder of the Progressive Policy Institute from 1989 to 1998, and principal economic advisor to Governor William J. Clinton in the 1991-1992 presidential campaign.
He holds a Ph.D. from Harvard University and has been a Fellow of the National Bureau of Economic Research, Harvard University, and the Brookings Institution.
Shapiro currently provides economic analysis to the law firms of O’Quinn, Laminack and Pirtle, Christian, Smith and Jewell, and Heard, Robins, Cloud, Lubel and Greenwood, on issues associated with naked short sales, which he noted includes “matters raised in an interview published by @DTCC with DTCC deputy general counsel Larry Thompson.”
He asserts the following in his letter:
Thompson begins by asserting that “the extent to which [naked short selling] occurs is in dispute.” While this statement may be narrowly correct, objective academic analysis has established that naked short selling has been a widespread practice and one which, when allowed to persist, can pose a threat to the integrity of equity markets. A recent study by Dr. Leslie Boni, then a visiting financial economist at the SEC, analyzed NSCC data and found that on three random days, an average of more than 700 listed stocks had failures-to-deliver of 60 million-to-120 million shares sold short – naked shorts – that had persisted for at least two months. In addition, over 800 unlisted stocks on any day had fails of 120 million-to-180 million shares sold short that also had persisted for at least two months. The total number of naked shorts, including those that had persisted for less than two months, was presumably considerably greater.
Regarding the extent of naked shorts, Thompson has provided closely-related additional information: “fails to deliver and receive amount to about $6 billion daily…including both new fails and aged fails.” Thompson minimizes this total by comparing it to “just under $400 billion in trades (emphasis added) processed daily by NSCC, or about 1.5% of the dollar volume.” By most people’s standards, a problem involving hundreds of millions of shares valued at $6 billion every day is a very large problem. Moreover, the $6 billion total substantially underestimates the actual value of all failed-to-deliver trades measured when the trades actually occurred. Most of the $6 billion total represents uncovered or naked short sales, many of which have gone undelivered for weeks or months with their market price being marked-to-market every day. As a stock’s price falls, the market price of naked shorts in that stock also declines, reducing the total value of the outstanding failures-to-deliver cited by Thompson.
In other respects, Thompson’s comparison to the “$400 billion in trades processed daily by NSCC” seems disingenuous and misleading, because that $400 billion total covers not only U.S. equity trades which can involve most of the failures-to-deliver at issue, but many other transactions also processed by the NSCC. The value of all equity transactions on U.S. markets in 2004, for example, averaged $82.3 billion/day. If Thompson is correct that the daily value of fails-to-deliver averages $6 billion, that total is equivalent to 7.2 percent of average daily equity trades or nearly five times the 1.5 percent level suggested by Thompson. Furthermore, the DTCC reports on its website that on a peak day, “through its Continuous Net Settlement (CNS) system, NSCC eliminated the need to settle 96 percent of total obligations.” Assuming that CNS nets out the same proportion of trades on other days, $384 billion of the $400 billion in daily trades cited by Thompson are netted out, leaving only $16 billion in daily trades that require the actual delivery of securities. The $6 billion of fails-to-deliver securities existing on any day are equivalent to 37.5 percent of the average daily trades that require the delivery of securities, or 25 times the 1.5 percent level cited by Thompson.
Thompson tries to explain the large numbers of shares that go undelivered – in most cases arising from naked short sales -- by citing problems with paper certificates, inevitable human error, and the legitimate operations of market makers. This also seems misleading or disingenuous. Regarding problems with paper certificates, the DTCC estimates that 97 percent of all stock certificates are now kept in electronic form. Nor can human error or legitimate market-making operations explain the high levels of failures-to-deliver that persist for months – on any day, an average of 180 million-to-300 million shares have gone undelivered for two months or longer – as documented by Dr. Boni’s analysis of NSCC data.
Thompson also disparages the attorneys who represent companies that have been damaged or destroyed by massive naked short sales, and their shareholders, by claiming falsely that the cases in this matter have almost all been dismissed or withdrawn. The legal firms that I advise -- O’Quinn, Petrie and Laminack; Christian, Smith and Jewell; and Heard, Robins, Cloud, Lubel and Greenwood – have not lost any motions against the DTCC or its affiliates and currently have one case against the DTCC pending in Nevada and another case against the DTCC pending in Arkansas. In addition, on February 24, 2005, these attorneys were granted an order by the New York Supreme Court ordering the DTCC to produce trading records involving two companies they represent, including records from the Stock Borrow program, which may establish whether large-scale naked short sales were used to manipulate and drive down the stock price of those two companies.
Thompson also asserts that the plaintiffs suing the DTCC for damages associated with the handling of naked short sales rely on “theories [that] are not an accurate reflection of how the capital market system actually works.” This assertion is inaccurate. There is no dispute about how the capital markets work -- nor any doubt that naked short sales have been used to manipulate and drive down the price of stocks, as seen in numerous death-spiral financing cases. The issue here is the DTCC’s role in allowing or facilitating such stock manipulation through its treatment of extended naked short sales.
In explaining the DTCC’s role in these matters, Thompson rejects the claim that the NSCC’s Stock Borrow program allows the same shares to be lent over and over again, potentially creating more shares than actually exist or “phantom” shares. By Thompson’s own account, shares borrowed by the NSCC to settle naked short sales are deducted from the lending member’s DTC account and credited to the DTC account of the member to whom the shares have been sold. Therefore, those same shares become available to be re-borrowed to settle another naked short sale and, if that happens, to be re-borrowed again and again to settle a succession of naked short sales. Throughout this process, the actual short sellers may continue to fail-to-deliver the shares to cover their shorts and, as Dr. Boni’s analysis of NSCC data found, the underlying failure can age for months or even years. The process which Thompson describes is one in which shares can be borrowed and lent over and over again, introducing more shares into the market than are legally registered and issued. If any ambiguity remains, Thompson can clarify it by responding to the following query: Once a share that has been borrowed through the NSCC Stock Borrow program is delivered to the purchaser, is that share restricted in any way so it cannot be lent again?
It is important to note that the Stock Borrow program is used when continuous net settlement cannot locate the shares to settle. As a consequence, Stock Borrow is usually called into play when there are relatively few shares available for borrowing. These are propitious conditions for market manipulation: Unscrupulous short sellers undertake large-scale naked short sales involving stocks for which few shares are available for trading and lending, relying on the Stock Borrow program to borrow the limited available shares, again and again, at sufficient levels to drive down the market price of the shares.
Thompson notes that of approximately $6 billion in outstanding failures-to-deliver existing on any day, “the Stock Borrow program is able to resolve about $1.1 billion … or about 20% [18 percent] of the total fail obligation.” In this statement, Thompson raises very serious questions about the integrity and operations of the NSCC and DTCC, which he can clarify by responding to the following queries: If the Stock Borrow program “resolves” only 18 percent of total fails, what is the disposition of the remaining 82 percent of outstanding fails? When failures-to-deliver occur that are not resolved through Stock Borrow, does the NSCC credit the undelivered shares to the member representing the buyer, creating genuine “phantom shares”? Finally, how many shares do the borrowing brokers, clearing firms and other participants in the Stock Borrow program owe the NSCC on a typical day, and what is their total value?
In a related matter, Thompson tries to distance the DTCC from charges that shares held in restricted accounts – for example, cash accounts, retirement accounts and many institutional accounts – are improperly lent through the Stock Borrow program by claiming that responsibility for segregating restricted shares from lendable shares falls to the “broker and bank members” of the DTCC, while responsibility for monitoring or regulating their performance in this matter falls to the stock exchanges and the SEC. As a trust company, the DTCC cannot hold that it has no role, duty or responsibility to ensure the probity of its operations. Thompson could address this issue by responding to the following queries: What procedures does the NSCC have to ensure that shares held in members’ accounts for possible loan through the NSCC Stock Borrow program are unencumbered by regulatory or legal restrictions from being pledged or assigned and eligible to be borrowed? On any given day, how many participants in the Stock Borrow program have lent shares that exceed their lendable shares, in what numbers and of what value?
Thompson also tries to distance the DTCC as far as possible from the naked short selling that generates most of the extended failures-to-deliver: “We don’t have any power or legal authority to regulate or stop short selling, naked or otherwise. We also have no power to force member firms to close out or resolve fails to deliver … we don’t even see whether a sale is short or not.” In fact, the DTCC chooses to not distinguish short sales from long sales, chooses to not regulate or stop extended naked short sales, and chooses to not force member firms to resolve protracted naked short sales.
First, Regulation SHO requires that all transactions be clearly marked short or long. If the DTCC and NSCC do not know whether sales are short or long as Thompson contends, they choose to not know. Second, the NSCC has a clear responsibility and adequate means to stop naked short sales of extended duration, with no legal barrier that would prevent them from so doing. As a trust company with an acknowledged duty to provide investors certainty in the settlement and clearance of equity transactions, the DTCC chose to carry out that duty by assuming the role of counterparty to both sides of every equity transaction, through the operations of the NSCC’s CNS system and the Stock Borrow program. By allowing short sellers to fail-to-deliver shares for months or even years, the NSCC clearly fails to provide certainty in settlement to the buyers, sellers and issuers of securities. Since it is widely known that extended naked short sales have been used to manipulate stock prices in cases of death-spiral financing, and the NSCC created the Stock Borrow program to address failures-to-deliver that prominently include naked short sales, the NSCC and DTCC share a responsibility with the SEC and the stock exchanges to protect investors by resolving extended fails.
Third, the DTCC and NSCC have the clear capacity to force member firms to resolve the extended failures-to-deliver of their customers by purchasing shares on the open market and deducting the cost from the member’s account. A 2003 study by Dr. Richard Evans and others provides evidence that forced buy-ins by any party occur very rarely. They found that a major options market maker who failed to deliver all or a portion of shares sold in 69,063 transactions in 1998-1999 was bought-in only 86 times or barely one-tenth of 1 percent of the fails. Thompson can clarify investors’ understanding of their operations by responding to the following query: What proportion of shares that are persistent fails-to-deliver, of one month or longer, are ever bought in?
Thompson acknowledges that the DTCC and NSCC know precisely how many failures-to-deliver exist for each stock and the precise duration of each of these fails. Yet, the DTCC refuses to disclose this information even to the issuer of the stock in question, which Thompson justifies by citing “NSCC rules” prohibiting such a release of data based on “the obvious reason that the trading data we receive could be used to manipulate the market, as well as reveal trading patterns of individual firms.” This response is both disingenuous and revealing. We know now, for the first time, that the DTCC has full knowledge of the extent of protracted, large-scale naked short sales in all particular cases. We also know now that the DTCC has had this information for at least a decade, since Thompson also notes that “fails, as a percentage of total trading, hasn’t changed in the last 10 years.” Yet, based on the DTCC’s own rules, it allowed these abuses to persist and fester. The DTCC and NSCC can change their rules at any time. Moreover, in this case, those rules are unjustified. Data documenting outstanding short sales in each stock are currently issued publicly, so further data on how many of those short sales are naked would not reveal additional information about the trading patterns of individual firms or in any way empower manipulators. In fact, the DTCC could substantially disarm manipulators by both publicly reporting naked short sales in each issue and pledging to force buy-ins of all naked short sales that persist for more than a limited period.
Surely, if large-scale, extended naked short sales have effectively created “phantom” shares, companies have a responsibility to their shareholders and the right to secure this information from the organization which manages the settlement of short sales. At a minimum, the DTCC should respond to requests by issuers for data on extended failures-to-deliver in their own stocks, both in the past and currently, so they can take steps to resist stock manipulators or bring them to account for past manipulation.
Thompson also claims that the DTCC did not create or manage the Stock Borrow program to serve its own financial interest, insisting that the service generates less than $2 million a year in direct fees to the DTCC and that all DTCC services are priced on a “not for profit” basis that seeks to match revenues with expenses. Without further information, these responses beg the question of whose private financial interest has been served by the Stock Borrow program, especially as the DTCC is owned by the stock markets, clearinghouses, brokerage and banking institutions that use its services. Thompson and the DTCC can clarify this serious matter by responding to the following queries: Do DTCC participant/owners receive interest or other payments through or from the Stock Borrow program for lending the shares of their customers and, if so, how much have they received for these activities over the last 10 years? Further, do DTCC participant/owners receive any dividend, interest or other payments or distributions from the DTCC or its subsidiaries?, Shapiro concluded.
In a recent editorial, Investrend Information head Gayle Essary questioned whether the board and principal shareholders would “be party to shenanigans that lead to the censorship or disabling of any media” that he says is “un-American activity.”
The DTCC’s letter to Investrend’s counsel, Marshal Shichtman, Esq., is posted at http://www.investrend.com/Admin/Topics/Articles/Resources/349_1113403487.pdf
Essary said that the arrogance the DTCC expressed in its censorship efforts shows that the entity has “become too large, too encompassing, too powerful, too unresponsive to those it serves, primarily the investing public, and too unresponsive to the Congress under whose auspices it should be operating.
“First, it is time to unconflict it, with real public representations on its board,” he said, and second, “it is time to break it up, with its various duties provided by smaller agencies under separate unconflicted boards.”
DTCC board members include Michael C. Bodson, Managing Director, Morgan Stanley (NYSE: MWD); Gary Bullock, Global Head of Logistics, Infrastructure, UBS Investment Bank (NYSE: UBS); Stephen P. Casper, Managing Director and Chief Operating Officer, Fischer Francis Trees & Watts, Inc.; Jill M. Considine,Chairman, President & Chief Executive Officer, The Depository Trust & Clearing Corporation (DTCC);
Also, Paul F. Costello, President, Business Services Group, Wachovia Securities (NYSE: WB); John W. Cummings, Senior Vice President & Head of Global Technology & Services, Merrill Lynch & Co. (NYSE: MER); Donald F. Donahue, Chief Operating Officer, The Depository Trust & Clearing Corporation (DTCC); Norman Eaker, General Partner, Edward Jones; George Hrabovsky, President, Alliance Global Investors Service; Catherine R. Kinney, President and Co-Chief Operating Officer, New York Stock Exchange; Thomas J. McCrossan, Executive Vice President, State Street Corporation (NYSE: STT); Bradley Abelow, Managing Director, Goldman Sachs (NYSE: GS); Jonathan E. Beyman, Chief Information Officer, Lehman Brothers (NYSE: LEH); and Frank J. Bisignano, Chief Administrative Officer and Senior Executive Vice President, Citigroup / Solomon Smith Barney's Corporate Investment Bank (NYSE: C), Eileen K. Murray, Managing Director, Credit Suisse First Boston (NYSE: CSR); James P. Palermo, Vice Chairman, Mellon Financial Corporation (NYSE: MEL); Thomas J. Perna, Senior Executive Vice President, Financial Companies Services Sector of The Bank of New York (NYSE: BNY); Ronald Purpora, Chief Executive Officer, Garban LLC; Douglas Shulman, President, Regulatory Services and Operations, NASD; and Thompson M. Swayne, Executive Vice President, JPMorgan Chase (NYSE: JPM).
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You're still all over these boards I see.
Janice, the only reason a person like you spends countless hours bashing a $0.0001 stock is because it's your primary source of income and you can't find anything that pays better.
And you're talking about other companies, not me.
You said "Many of the companies you're talking about don't even do any business, apart from selling stock"
I never said that! I asked you to give me examples ... meaning instances. But you can't.
Try again ,, I'll be back. I've got better things to do than spend 24/7 on iHub bashing stocks.
Give me examples ... and when?
... Many of the companies you're talking about don't even do any business, apart from selling stock ...
If the regulations were enforced Janice you wouldn't have a job.
The only reasons a person will spend countless hours bashing a $0.0001 stock is:
1. They stand to make one SH of a pile of money if they can drive it out of business.
2. It's their source of income and they can't find anything that pays more.
Only for those who can understand what they read ...
http://www.investigatethesec.com/DP300505.pdf
Congressional Research Service ˜ The Library of Congress”
CRS Report for Congress Received through the CRS Web
Order Code RS22099
March 30, 2005
Regulation of Naked Short Selling
Mark Jickling
Specialist in Public Finance Government and Finance Division
Summary
Short sellers borrow stock, sell it, and hope to profit if they can buy back the same number of shares later at a lower price. In effect, a short sale is a bet that a stock’s price will fall. A short sale is said to be “naked” if the broker does not in fact borrow shares to deliver to the buyer. When executed on a large scale, naked short sales can equal a large portion of total shares outstanding, and can put serious downward pressure on a stock’s price. Critics of the practice characterize it as a form of illegal price manipulation. The Securities and Exchange Commission (SEC) recently adopted rules designed to control short selling abuses, but calls for further restrictions on the practice continue. This report describes the mechanics of short selling, summarizes the new SEC rule, and analyzes the impact of short selling in the marketplace. It will be updated if events warrant.
Short selling was best described by Daniel Drew, the Gilded Age speculator and robber baron: “He that sells what isn’t his’n, must buy it back or go to prison.” Short sellers borrow shares from a broker, sell them, and make a profit if the share price subsequently drops, allowing them to buy back the same number of shares for less. In other words, short selling is a bet that the price of a stock will fall.
Short sellers have always been unpopular on Wall Street. Like skeletons at the feast, they seem to oppose rising values, increasing wealth, and general prosperity. However, most market participants recognize that they provide a valuable service to the extent that
they identify companies and industries that are overvalued by investors in the grip of irrational exuberance. By bringing such valuations down to earth, short selling can prevent economically wasteful over-allocation of resources to those firms and sectors.
Manipulation by Short Sellers
Another persistent complaint against short sellers is that they cause artificial price volatility. A form of manipulation common in the 19th century was the “bear raid” — a gang of speculators would sell a stock short, causing the price to drop. They would
follow with another wave of short sales, depressing the price still further, and so on, until the stock’s price was driven to the floor.
1 Rule 10a-1(a). The rule technically applies only to exchange-listed stocks, but a comparable rule was extended to Nasdaq National Market System stocks in 1994.
2 Louis Loss, Fundamentals of Securities Regulation (Boston: Little Brown, 1983), p. 717.
3 Release No. 34-48709, “Short Sales: Proposed Rule,” Oct. 28, 2003.
In the 1930s, the Securities and Exchange Commission (SEC) adopted a regulation to prevent bear raiding. The “uptick rule”1 states that a short sale may occur only if the last price movement in a stock’s price was upward. This prevents short sellers from piling onto a falling stock and setting off a downward price spiral. In the words of a standard securities law textbook, the tick test (and related rules) “seem pretty well to have taken the caffeine out of the short sale.”2
However, in recent years, complaints about manipulative short selling have reappeared. Many shareholders and officers of smaller firms have identified “naked” short selling as a source of price manipulation and have criticized the SEC’s enforcement record.
Naked Shorting
A short sale always involves the sale of shares that the seller does not own. The buyer, however, expects to receive real shares. Where do those shares come from? Normally, they are borrowed by the broker from another investor or from a brokerage’s own account. This is not difficult to do if the shares are issued by a large company, where millions of shares change hands daily and where many shares are not registered to the actual owners, but are held in “street name,” that is, in the broker’s account. With smaller corporations, however, the number of shares in circulation may be limited, and brokers may find it difficult to locate shares to deliver to the buyer in a short sale transaction. When shares are not located to “cover” a short sale, the short position is said to be naked. If shares are not found by the time the transaction must be settled, there is a “failure to deliver” shares to the buyer. If it occurs sporadically and on a small scale, naked short selling does not raise serious manipulation concerns. However, when the number of shares sold short represents a significant fraction of all shares outstanding, there may be a strong impact on the share price. In such cases, when naked short selling creates a virtually unlimited quantity of shares, a market based on supply and demand can be seriously distorted. The SEC notes that “naked short sellers enjoy greater leverage than if they were required to borrow securities and deliver within a reasonable time period, and they may use this additional leverage to engage in trading activities that deliberately depress the price of a security.”3
The case against naked short selling has been that by permitting short sales to occur when there is no possibility of actually delivering shares to the buyers, brokers and dealers accommodate manipulation. When naked short selling drives prices down, holders of the stock understandably feel cheated. They don’t believe the stock is overvalued; they are not selling; but the price drops anyway.
4 Market makers are dealers who stand ready to buy or sell a stock at any time and who publish the prices at which they are willing to trade. They are the key intermediaries on the Nasdaq; on the New York Stock Exchange, they are called specialists.
5 The uptick rule does not apply to OTCBB stocks.
6 Release No. 34-50103, “Short Sales: Final Rule,” July 28, 2004. Available online at
http://www.sec.gov/rules/final/34-50103.htm
It is important to note that naked short selling is not always evidence of intent to manipulate prices. Under certain circumstances, a market maker4 may engage in naked short selling to stabilize the market. For example, assume that there is a sudden flurry of buy orders for a stock. The market maker may judge the buying interest to be temporary and not justified by any real news about the company’s prospects. It may be the result of a questionable press release or a rumor in an Internet chat room. The market maker may choose to sell short to avoid what in its view would be an unjustified run-up in the stock’s price. In this situation, naked short selling by the market maker may protect investors against manipulation.
The problem of naked shorting is largely confined to smaller firms, and is particularly acute in small-capitalization “penny” stocks listed on the Nasdaq bulletin board market (OTCBB).5 In these companies, the bulk of outstanding shares may be owned by corporate insiders or by securities dealers who act as market makers, so that relatively few shares are generally available for purchase on the open market. This means that transactions have a proportionately greater impact on the stock price than do trades of the same size in the shares of a larger company, making manipulation easier. In addition to OTCBB stocks, however, smaller companies listed on the exchanges or the Nasdaq national market may also be vulnerable to short selling abuse.
Regulation SHO
After several years of deliberation, the SEC in 2004 adopted rules designed to control abusive naked short selling. Regulation SHO6 took effect on January 3, 2005. The new regulation replaces existing exchange and Nasdaq rules with a uniform national standard. Under Regulation SHO, a broker may not accept a short sale order from a customer, or effect a short sale for its own account, unless it
• has either borrowed the security, or made a bona fide arrangement to borrow it; or
• has reasonable grounds to believe that it can locate the security, borrow it, and deliver it to the buyer by the date delivery is due; and
• has documented compliance with the above.
The appearance of a stock on an exchange’s “easy to borrow” list constitutes reasonable grounds for believing that the stock can be located. Stocks on such lists tend to be highly capitalized, with large numbers of shares in circulation.
7 “Of Stocks and Socks: Senator Bennett Bores In On SECs Dismal Naked Short Sales Record,” FinancialWire, Mar. 14, 2005, p. 1
8 Dean Foust, “Why the Shorts Have Long Faces,” Business Week, Feb. 28, 2005, p. 86.
If a broker executes a short sale, and then fails to deliver shares to the purchaser, further restrictions on short selling may come into force. If the “fail to deliver” position is 10,000 shares or more, for five consecutive trading days, and the position amounts to at least 0.5% of total shares outstanding, the stock becomes a threshold security. The exchanges and Nasdaq are now required to publish daily lists of threshold securities.
Regulation SHO specifies that if a fail to deliver position in a threshold security persists for 13 trading days, the broker (or the broker’s clearing house) must close the short position by purchasing securities of like kind and quantity. After the 13 days have elapsed, the broker may not accept any more short sale orders until the fail to deliver position is closed by purchasing securities.
The rules include exemptions for market makers engaged in bona fide marketmaking activities, and for certain transactions between brokers.
Effects of Regulation SHO
The adoption of Regulation SHO has not put an end to investor complaints about naked short selling. Complaints are heard that the SEC is not enforcing the rules vigorously enough, that short selling continues, and that some brokers evade the 13-day requirement by passing fail to deliver positions from one to another.7
There is anecdotal evidence that Regulation SHO has unintentionally created opportunities for a new type of manipulation, known as the short squeeze. The threshold securities list identifies stocks where short sellers are active. Certain traders have reportedly made large purchases of stocks listed as threshold securities.8 When these purchases drive the price up, pressure increases on short sellers as their positions lose money. (If prices rise, a short seller must pay more than the proceeds of the short sale to replace the borrowed shares.) Brokers issue margin calls to ask for more collateral to protect themselves against default. If the short sellers cannot meet those demands, they must close out their positions, which requires the purchase of shares, driving the price still higher.
Is Further Action Needed?
Since it has been in effect only a few months, many observers would think it premature to pass judgment on the effectiveness of Regulation SHO in curtailing abuses. Critics of short selling, however, are likely to continue to press for more stringent restrictions or even abolition of the practice. There would be several costs to such actions.
First, as noted above, short selling can improve the functioning of the market’s price setting mechanism. Unless they engage in illegal manipulation, short sellers can stay in business only if they successfully identify overvalued stocks. Without the information provided by short sellers, the market might allocate capital less efficiently.
Second, while restrictions on short selling discourage certain forms of manipulation, they may encourage or facilitate others. Manipulations that involve artificially inflating stock prices are probably more common than techniques (like naked shorting) that seek to depress them. Rumors, false press releases, and unexpected purchases may all cause sudden run-ups of stock prices, which may be followed (in the classic “pump-and-dump” fraud) by sudden collapse, as the manipulators sell their shares to the unwary. Without short selling as a counterweight, the magnitude and duration of such fraudulent run-ups are likely to be greater.
Finally, it should be noted that the SEC has full authority to pursue securities fraud of any type, regardless of the mechanism employed. The SEC’s enforcement record in the recent past is open to question, but this does not necessarily indicate that the existing statutes and regulations are overly permissive regarding manipulation of securities prices.
THREE BIG FLAWS FOUND IN AGENCY'S INTERNAL SYSTEMS
By Deborah Lohse
Posted on Fri, May. 27, 2005
Mercury News
Like a professor flunking part of his own test, the agency that grades corporate America on its accounting announced Thursday that it had three major flaws of its own in its internal systems for preventing financial fraud or mistakes.
The Securities and Exchange Commission got a passing grade for financial accuracy in its first-ever audited financial statements. But the Government Accountability Office found the SEC lacking in how it tracks fines and penalties collected from corporations and others, how it ensures that unauthorized people can't tamper with its computer systems, and how it prepares its financial reports.
The finding was part of the SEC's first annual Performance and Accountability report, required by a 2002 law that aimed to make government agencies account for how they spend taxpayer dollars.
That the SEC had to disclose three ``weaknesses'' will probably be a bittersweet irony for the hundreds of valley companies that file their financial reports for SEC approval. Many of them have been loudly decrying the cost and burden of new requirements to document and test such controls, while getting only minimal relief from the SEC.
``This will probably give people in public companies a lot of emotional satisfaction, seeing the SEC hoisted on its own petard,'' said Bill Sherman, a corporate lawyer with Morrison & Foerster in Palo Alto.
Asked by reporters on a conference call if it was embarrassed to have failed standards it enforces every day, the SEC reacted like many of the dozens of companies that have reported material weaknesses -- by focusing on the positive.
``We feel the process was a healthy process,'' said Peter Derby, the SEC's managing executive for operations, noting that the SEC was fixing the problems.
Other executives say they'd laugh at the irony if they weren't still crying over the multimillion-dollar cost and thousands of hours required to document and test their controls -- made mandatory in the 2002 corporate crackdown law known as Sarbanes-Oxley. ``It's amusing,'' said Bryan Stolle, chief executive of Agile Software.
``But the damage and the pain is so high, it's a shame.''
David Dunlap, chief financial officer at Socket Communications in Newark, said he's not surprised the SEC's first audit wouldn't be perfect. But he said it's ``satisfying'' that the SEC is now following its own rules.
``What's good for the goose is good for the gander.''
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Contact Deborah Lohse at dlohse@mercurynews.com or (408) 271-3672.
This is good. Maybe we the taxpayers should file for a proceeding to have the SEC revoked or suspended for 12 months?
LOLOLOL Toooooooooooooo d**n funny.
http://www.washingtonpost.com/wp-dyn/content/article/2005/05/26/AR2005052601106.html
Ex-Friedman Billings CEO Faces Civil Charges
Last week, former hedge fund manager Hilary Shane agreed to pay $1.45 million in fines and restitution after being charged by securities regulators with fraud and insider trading in the same PIPE deal. The settlement with Shane is the first one to emerge from a yearlong investigation into stock manipulation in the $14 billion market for PIPEs, which are used mainly by small, cash-strapped companies.
Securities regulators also have served Wells notices on Dreyer and Nichols, contending they aided and abetted wrongful activity.
To date, FBR has shed little light on the nature of violations alleged by regulators. People familiar with the investigation say it has focused on trading activity by FBR in shares of Compudyne in advance of the PIPE becoming public. The investment firm may have been shorting shares of Compudyne in order to profit from the typical decline in the shares of a company doing a PIPE deal.
Friedman's registration statement says "the activities being investigated include trading done in the subject issuer's stock on behalf of FBR (in a firm account)."
http://www.thestreet.com/pf/markets/matthewgoldstein/10225247.html
It sometimes stinks in here.
Hasher have you got a broken colostomy bag?