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jimmy, do you have any info about mona raising money for OOgie's family? Did she ask them to mail the donations directly to his family? If not, did anyone verify if his family receive all or any of the funds she may have collected?
http://qbidtalk.proboards.com/index.cgi?board=general&action=display&thread=8005&page=2
By wodansbankerfriend
"We are now taking up a collection for OOgie who died a few days ago and left his family without insurance. We have all gladly given of ourselves and our money if we have any to help each other. "
Interesting, as I am told nothing was ever forwarded to Ooggies family. Mona, you are a liar, and if you received funds for Ooggies family you are also a thief.
By seeking
That's why Mona left the HT. I kept asking her if she is so concerned about the SH'ers & how badly they need the payout to happen, why she had a room that charged SH'ers money to get info... This was couple of her replies... Blah Blah Blah!
Feb 4, 2011, monalisasmiles wrote:
Because in paltalk you can actually get on the mic and talk as well as type in the scroll...there is more dynamic interaction. It's like talking on the phone versus writing a letter. It is the only way to be able to do this in a large crowd of people.. Believe me we have checked to see if there were venues at least as good... That kind of bandwidth costs. but for those of us who like to discuss ideas..its worth it. Most people chip in so the cost isnt so bad for all the friendships that have formed and the things we do for each other.
Thanks for asking.
Mona
Feb 4, 2011, monalisasmiles wrote:
Seeking,
Just to bring you up to speed on the questions you asked of me:
Paltalk charges to use their bandwidth..they have since day one almost 8 years ago. All the paltalk rooms are priced according to their size..it is a hefty price and yes they are the only ones so far (except for Deli) who is making any money off our stock. I suppose there may be a few others selling their stocks who have made money.
Anyway..back to paltalk:I can tell you this: I have put in approx 6 years service... almost a full time job running a basher free room, and working as a nurse full time to boot. I GET NO MONEY for my service. I do it VOLUNTARILY. We have to collect money from shareholders to keep the rooms open. That money goes directly to paltalk to pay for the room. Paltalk gives me a total headache every time I have to deal with them, it is not pretty their level of incompetence in running their website.
The only reason the room is open is because people want to have a place where they can talk to each other and share info and basically, make friends with like minded people.That is what we do in our room. We are supportive of people who just want to know about the stock and not bash others. The room has fine tuned over the years and I trust the people in it as they trust me to just be real and kind at the same time.
As a matter of fact we have taken up collections for members who are hurting such as tropical who lost her home recently (we gave her 1K to talk to a lawyer). We are now taking up a collection for OOgie who died a few days ago and left his family without insurance. We have all gladly given of ourselves and our money if we have any to help each other. We also provide much needed support on most any topic or area of need since there are so many there with different backgrounds and talents. And I am proud to say...so many people have stepped up to the plate to offer themselves to help others whatever the need. THAT, to me, makes it all worth it..all the years spent keeping a place open for this kind of help. I see it as a mission. Portrush once said to me "I wouldn't blame you if you took some of the money for yourself to do this service". But I can tell you if anything, I have given money...I have never taken a dime, because it is not about me..it is about the shareholders and helping them. We run a room that supports Christians and some don't go there for that reason.
Now a short note about ACCA....if you were in paltalk you would know that I have never supported his antics, nor his ideas.
I could yell at people who slander others, saying they are stealing money from shareholders ...when the truth is far from it. But I leave that to my creator to judge because I know he will do a better job at the final illumination than I ever will.
I hope this helps..I will be doing several back to back shifts at work making money..yes I DO make money as a nurse. So I won't be around much as I have the past few days. Thanks for asking the above questions and I hope I have helped you understand better about paltalk.
Mona
ROFL
Nuf, nice job finding the CMKX psychic! Next on the agenda is the CMKX dowser. lol
PLAM READING
CMKX lingo is catching on!
***New court date 4/4/2012***
Dang! We have nearly another year before the real action begins. In CMKXland the wait means another 1000 rumors (lies) from gurus, continuing shameful letters by Krazy Al, and more ailments/computer problems for eggie. The fun never ends!
Nufced, thanks for providing the new info, plus all the other documents you have generously shared with everyone.
Best regards!
152 Filed & Entered: 05/12/2011
Unopposed Motion
Docket Text: UNOPPOSED MOTION Continue Trial Date by Ginger Gutierrez. Motion ripe 5/12/2011. (Rasmussen, Chris)
153 Filed & Entered: 05/12/2011
Motion for Joinder
Docket Text: MOTION for Joinder to Defendant Ginger Gutierrez' Motion To Continue Trial Date [152] by James Kinney. Motion ripe 5/12/2011. (Naylor, Jacqueline) Modified to link to motion on 5/13/2011 (LMC).
154 Filed & Entered: 05/13/2011
Motion for Joinder
Docket Text: MOTION for Joinder to [152] Motion to Continue Trial by Brian Dvorak. Motion ripe 5/13/2011. (Hall, John) Modified to link to motion on 5/13/2011 (LMC).
155 Filed & Entered: 05/16/2011
Stipulation
Docket Text: STIPULATION FOR EXTENSION OF TIME (Second Request) to Continue Trial by Ginger Gutierrez. (Rasmussen, Chris)
UPDATE
Filed: 05/16/2011
Entered: 05/17/2011
Notice of Docket Correction
Docket Text: NOTICE of Docket Correction to [155] Stipulation as to John M. Edwards, Urban Casavant, Helen Bagley, Brian Dvorak, Ginger Gutierrez, James Kinney, Jeffrey Turino, Nickolaj Vissokovsky, Melissa Spooner, Jeffrey Mitchell: ERROR: Stipulation not linked to all defendants involved. CORRECTED BY COURT. Attorney Chris Rasmussen reminded that all filings MUST be linked to the defendant(s) to which they pertain. If counsel needs assistance in correctly filing documents, please contact the help desk at 464-5555. (no image attached)(LMC)
155 Filed & Entered: 05/16/2011
Stipulation
Docket Text: STIPULATION (Second Request) to Continue Trial by Ginger Gutierrez as to Ginger Gutierrez, James Kiney, Brian Dvorak, Helen Baglen, Jeff Mitchell and Melissa Spooner. (Rasmussen, Chris) Modified to show other defendnats included on this stipulation on 5/17/2011 (LMC).
156 Filed & Entered: 05/18/2011
Order to Continue - Ends of Justice
Docket Text: ORDER TO CONTINUE - Ends of Justice - Granting [155] Stipulation to Continue Trial as to Helen Bagley, Brian Dvorak, Ginger Gutierrez, James Kinney, Melissa Spooner, and Jeffrey Mitchell. Time excluded from 10/18/11 until 4/9/12. Jury Trial set for 4/9/2012 08:30 AM in LV Courtroom 6C before Judge Roger L. Hunt. Calendar Call set for 4/4/2012 08:45 AM in LV Courtroom 6C before Judge Roger L. Hunt. Signed by Judge Roger L. Hunt on 5/18/11. (Copies have been distributed pursuant to the NEF - ASB)
http://www.scribd.com/doc/55626900/Https....5233981-0-32308
Sorta sounds like our Gov a little huh?
good one, jimmy! lol
There's always a few rotten apples in the barrel.
But coming back to the States wouldn't be a good idea either
No doubt! lol
But if you had a choice the prisons are nicer in the U.S. than the Philippines.
You seem to think wall street is full of good business folks that would NEVER take advantage of anyone buy selling something they never delivered?
Actually, I believe Wall Street (really all markets in general) is loaded with opportunist who take advantage of situations which make their clients/shareholders money. Some have ethics and others do not. Some are corrupted by greed and break the law. It is no different than the rest of society.
What is puzzling is people who are aware penny stocks is where you will find the most fraudsters posing as legit businessmen/women, yet they still insist on throwing money at them while generalizing about how corrupt Wall Street is.
There are average citizens who have retired on capital gains made from companies traded on major exchanges. The norm from penny stock investors is they lost all their money.
Quite reasonably priced, really.
With bail set at a measly $667 what is to prevent someone like Pearl from leaving the country, if indeed she is still in the Philippines?
Why yes and you believe blienkfiend is doing Gods work I suppose?
Huh?
I don't have any clue what that means. Sometimes you can be the Gary Busey of message boards. lol
Hard to believe that people can be that utterly insane, huh?
Good ole gus! lol
Just catching up on the latest Xer madness.
Unbelievable that this new attorney is supposedly an associate of Wes Christian. Now anyone, ANYONE with half a brain would realized these guys have failed miserably at every attempted naked short, or naked short related lawsuit. If that wasn't bad enough, now squid is endorsing their choice hiring this particular attorney because he may be an associate of Christian's. Sounds like another kiss of death Xer madness style.
The wheels on the bus go round and round, round and round, round and round. The wheels on the bus go round and round.............
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=62465200
He also has the blessing of being attached to Wes Christian, a man who I have spoken to and deeply respect.
From: Jeffrey S. Mitchell
Re: Spring 2009 -- NYU Journal of Law and Business: In Pursuit of the Naked Short (Part 2 of 2)
[Note: SI often adds punctuation to the links making them invalid. Delete the punctuation.]
1. Miller v. Asensio, 101 F. Supp. 2d 395, 398 (D.S.C. 2000).
2. See, e.g., Deborah Solomon, SEC Is Set to Approve Plan to Ease Short-Selling Curbs for One Year, WALL ST. J., June 23, 2004, at C3.
3. Brokers, in turn, borrow the necessary security from custody banks, fund management companies, and other customers who own long positions in the stock. When borrowing from customers who have fully paid for their long positions, the broker must obtain their permission, provide collateral, and pay them a fee. Brokers then charge the short-seller a fee of approximately five-to-ten base points to cover these transaction costs. In fewer cases, brokers may borrow shares from other brokers, although this practice is usually reserved for their large institutional customers.
4. See Symposium, Tax Issues Raised by Financial Products: Shorts Against The Box, Collars and Equity Derivatives, 13 ST. JOHN’S J. LEGAL COMMENT. 1, 14 (1998); Michelle Celarier, Weekend Reading: Profile of a Short Seller: Rocker’s Passion for Shorting, N.Y.Times.com, Apr. 14, 2006, http://dealbook.blogs.nytimes.com/2006/04/14/weekend-reading-profile-of-a-short-seller/; Zachary T. Knepper, Future-Priced Convertible Securities and the Outlook for “Death Spiral” Securities-Fraud Litigation, 26 WHITTIER L. REV. 359, 369 (2004).
5. U.S. Securities and Exchange Commission Division of Market Regulation, Key Points About Regulation SHO (modified Apr. 11, 2005), http://www.sec.gov/spotlight/keyregshoissues.htm.
6. See, e.g., GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189, 194-95 (3d Cir. 2001); Sullivan & Long v. Scattered Corp., 47 F.3d 857, 864 (7th Cir. 1995). Note, however, that other countries treat short-selling differently. Canada, for example, has more liberal short-selling rules than does the United States, whereas China bans short-selling outright. See, e.g., Anchada Charoenrook & Hazem Daouk, Market-Wide Short-Selling Restrictions, Aug. 2005, available at http://mba.vanderbilt.edu/vanderbilt/data/research/1017full.pdf.
7. LAW V. MEDCO RESEARCH, INC., 113 F.3D 781, 784 (7TH CIR. 1997).
8. Kevin Kelleher, Naked Before Byrne, TheStreet.com, Aug. 18, 2005, http://www.thestreet.com/tech/kevinkelleher/10238633.html.
9. MARK JICKLING, CRS REPORT FOR CONGRESS: REGULATION OF NAKED SHORT SELLING, CONG. RES. SERVICE, Mar. 30, 2005 at 1.
10. Kelleher, supra note 8; see also Celarier, supra note 4 (profiling short- seller David Rocker, who claims that he gets “the bad guys off the street” and sanitizes the markets from “frauds, fads, and failures” through short-selling).
11. Knepper, supra note 4, at 369; see also FSA Cracks Down on Short Selling, BBC NEWS, June 13, 2008, http://news.bbc.co.uk/go/pr/fr/-/1/hi/business/7452312.stm; Arturo Bris, William N. Goetzmann, & Ning Zhu, Efficiency and the Bear: Short Sales and Markets around the World, January 2003, available at http://www.sec.gov/spotlight/hedgefunds/hedge-efficiency.pdf.
12. Jickling, supra note 9, at CRS-5. See also Rajesh Aggarwal & Guojun Wu, Stock Market Manipulation: Theory and Evidence, AFA 2004 San Diego Meetings (March 11, 2003), available at http://groups.haas.berkeley.edu/afa/UPDF/P306_Asset_Pricing.pdf (arguing that 84.51% of market manipulation cases involve the inflation of stock process while less than 1% of cases involve deflation of stock prices).
13. See Amendments to Regulation SHO, Exchange Act Release No. 54,154, 2006 WL 2712000, at *1 (proposed July 14, 2006), available at http://www.sec.gov/rules/proposed/2006/34-54154.pdf.
14. See, e.g., Alistair Barr, ‘Naked’ Short Selling Is Center of Looming Legal Battle, MARKETWATCH, June 14, 2006, available at http://www.marketwatch.com/news/story/naked-short-selling-center-looming/story.aspx?guid=%B4B3FE0D6-1EFF-4986-83B3-54F21475CA1C%7D. But see Depository Trust & Clearing Corp., oration, DTCC’s Updated Critique of Section 4.1 of Prof. Finnerty’s Paper, “Short Selling, Death Spiral Convertibles, and the Profitability of Stock Manipulation” (January 24, 2006), available at www.dtcc.com/news/press/releases/2006/finnerty.php (arguing that “phantom shares” is a “pejorative expression” that mischaracterizes the role of the DTCC).
15. U.S. Securities and Exchange Commission, Naked Short Sales, (modified Apr. 18, 2005) http://www.sec.gov/answers/nakedshortsale.htm
16. Kelleher, supra note 8. 17. Depository Trust & Cleaning Corporation, Our Business: An Overview, http://www.dtcc.com/about/business/index.php.
18. Id.
19. Id.
20. Depository trust & clearing corp., Media Statement on Robert Shapiro’sReport on Naked Short Sales, www.dtcc.com/news/press/releases/2006/shapiro.php.
21. U.S. Securities and Exchange Commission, Settling Securities Transactions, T+3, http://www.sec.gov/answers/tplus3.htm. Note that this three-day settlement date applies to stocks, bonds, municipal securities, mutual funds traded through a brokerage firm, and limited partnerships that trade on an exchange. Government securities and stock options settle on the next business day following the trade. Id. Also, the import of this rule is that for the three-day period, even a normal short sale temporarily creates multiple beneficial owners and thus deflates stock price because while the short position is open, there is essentially an extra, phantom share.
22. See id.
23. See BOB O’BRIEN, SYMPHONY OF GREED: FINANCIAL TERRORISM AND SUPER-CRIME ON WALL STREET 26 (2006), http://thesanitycheck.com/Portals/0/Symphony.pdf.
24. Depository Trust and Clearing Corp., DTCC’s Updated Critique of Section 4.1 of Prof. Finnerty’s Paper, “Short Selling, Death Spiral Convertibles and the Profitability of Stock Manipulation,” http://www.dtcc.com/news/press/releases/2006/finnerty.php (last visited Jan. 21, 2009). http://www.dtcc.com/ThoughtLeadership/keyissues/finnerty.htm?shell=false (last accessed Dec. 11, 2006).
25. See BOB O’BRIEN, SYMPHONY OF GREED: FINANCIAL TERRORISM AND SUPER-CRIME ON WALL STREET 26 (2006), http://thesanitycheck.com/Portals/0/Symphony.pdf.
26. See id. at 26-27.
27. See id.
28. See SEC Appendix § 7.1, http://sec.gov/divisions/marketreg/mrfaqregsho1204.htm (updated May 6, 2005).
29. Kelleher, supra note 8 (citing Alan Newman).
30. While the aggregate number of positions reflected in customer accounts at brokerages may be greater than the number of securities issued and outstanding, thus creating this “artificial” supply, naked short-selling does not affect the issuer’s total shares outstanding. See United States Securities and Exchange Commission, Division of Market Regulation: Responses to Frequently Asked Questions Concerning Regulation SHO, http://sec.gov/divisions/marketreg/mrfaqregsho1204.htm (last visited Jan. 29, 2009). However, when multiple investors have claims to the same share of stock, this can create problems regarding shareholders’ rights to vote and to dividends.
31. See, e.g., Philip Dickerson, Regulation SHO, 24 ANN. REV. BANKING & FIN. L. 181, 181 (2005).
32. See, e.g., Daniel Kadlec, Watch Out, They Bite!, TIME, Nov. 9, 2005, http://www.time.com/insidebiz/printout/0,8816,1126706,00.html.
33. For a thorough discussion of such future-priced convertible securities, see Knepper, supra note 4, at 364-65, 367.
34. Id. at 367.
35. Id.
36. Karl Thiel, Who’s Behind Naked Shorting?, THE MOTLEY FOOL, Mar. 30, 2005, http://www.fool.com/news/commentary/2005/commentary05033008.htm.
37. See, e.g., Barr, supra note 14; Dickerson, supra note 31, at 181; Knep- per, supra note 4, at 367.
38. See Ellen Simon, “Wall Street: Overstock.com’s Naked Short Selling Problem, PITTSBURGH POST-GAZETTE, Feb. 4, 2006, available at http://www.post-gazette.com/pg/06035/649757-28.stm; Depository Trust & Clearing Corp., Naked Short Selling and the Stock Borrow Program, http://www.dtcc.com/news/newsletters/dtcc/2005/mar/naked_short_selling.php (last visited Feb. 9, 2009); Depository Trust & Clearing Corp., Regulators Say Reg SHO Is Working, http://www.dtcc.com/news/press/releases/2006/sho.php (last visited Feb. 9, 2009). But see, e.g., Barr, supra note 14.
39. Barr, supra note 14. But see Depository Trust & Clearing Corp., Media Statement on Robert Shapiro’s Report on Naked Short Sales, http://www.dtcc.com/news/press/releases/2006/shapiro.php (last visited Feb. 11, 2009) (alleging that “Robert Shapiro’s report is replete with errors, baseless numbers (e.g., estimated fails), faulty analysis.”).
40. Kadlec, supra note 32. For a detailed summary of the plaintiff bar’s perspective on naked shorting, see James W. Christian, Robert Shapiro, & John-Paul Whalen, Naked Short Selling: How Exposed are Investors?, 43 HOUS. L. REV. 1033 (2006).
41. Simon, supra note 38.
42. Naked Short Selling, THE FINANCIAL TIMES. July 6, 2006.
43. Holman W. Jenkins, Jr., Do Nudists Run Wall Street?, WALL ST. J. ONLINE, Apr. 12, 2006, http://online.wsj.com/article/SB114480254610823574.html.
44. Cameron Funkhouser, Remarks at the NASAA Conference on Naked Short Selling, Nov. 30, 2005 at 9.
45. Cameron Funkhouser, Remarks at the NASAA Conference on Naked Short Selling, Nov. 30, 2005.
46. Kelleher, supra note 8.
47. See, e.g., Matthew McClearn, Predator or Prey: The Mysterious World of Death-Spiral Finance, TORONTO STAR, Oct. 15, 2002, at B1, available at http://www.rgm.com/articles/predatororprey.html.
48. Investopedia, Naked Shorting, http://www.investopedia.com/terms/n/nakedshorting.asp (last visited March 20, 2009).
49. Id.
50. Interview by Rick Casterline with Warren Buffett, CEO, Berkshire Hathaway, (May 6, 2006), http://www.fool.com/investing/value/2006/06/01/berkshire-behind-the-scenes-part-5.aspx.
51. CRS Report for Congress, Regulation of Naked Short Selling, Mar. 30, 2005, at CRS-3.
52. For perspective on naked shorting’s economic and financial impact, see Christopher L. Culp & J.B. Heaton, Naked Shorting, available at http://ssrn.com/abstract=982898; John D. Finnerty, Short Selling, Death Spiral Convertibles, and The Profitability of Stock Manipulation, available at http://www.fma.org/Chicago/Papers/ShortSellingManipulationPaper0926.pdf.
53. See, e.g., Securities and Exchange Commission, Division of Market Regulation: Key Points About Regulation SHO, Apr. 11, 2005, available at http://www.sec.gov.spotlight/keyregshoissues.htm (“Fraudsters may use naked short selling as a tool to manipulate the market. Market manipulation is illegal.”).
54. For purposes of this article, small-cap companies are defined as having less than $1 billion in approximate market capitalization; micro-caps, a subset of small-caps, are companies with an approximate market capitalization value of less than $100 million. Market capitalization is the measurement of corporate size based on the current stock price multiplied by the number of outstanding shares.
55. See, e.g., Gary Matsumoto, Naked Short Sales Hint Fraud in Bringing Down Lehman, Bloomberg.com, Mar. 19, 2009, available at http://www.bloomberg.com/apps/news?pid=20601109&sid=aB1jlqmFOTCA&refer.
56. See Gregory M. Drahuschak, Selling Stock Short Shouldn’t Get Blame for a Precipitous Decline, PITTSBURGH TRIBUNE-REVIEW, Apr. 30, 2006, available at http://www.pittsburghlive.com/x/pittsburghtrib/business/columnists/drahuschak/s_448984.html; John R. Emshwiller and Gary McWilliams, SkillingTestimony Leaves Room for Prosecutors, WALL ST. J., Apr. 14, 2006.
57. SEC Release No. 58166, available at www.sec.gov/rules/other/2008/34-58166.pdf.
58. Ellen Simon, Overstock.com’s ”Naked Short Sellers’ Target Overstock, Feb. 5, 2006, available at http://www.usatoday.com/tech/news/2006-02-05-overstock-stock_x.htm. Byrne also “likened the conspiracy to an organization structured like al Qaeda” and claimed that naked short-sellers have ties to Italian, Russian, and Israeli mafia. Id.
59. Liz Moyer, Naked Short Victim Strikes Back, FORBES.COM, Feb. 2, 2007, available at http://www.forbes.com/business/2007/02/02/naked-short-suitoverstock-biz-cx_lm_0202naked.html.
60. Simon, supra note 58.
61. Thiel, supra note 36.
62. Simon, supra note 58.
63. Kelleher, supra note 8; see also Karl Thiel, The Naked Truth on Illegal Shorting, THE MOTLEY FOOL, Mar. 24, 2005, http://www.fool.com/news/commentary/2005/commentary05032407.htm.
64. E.g., Phantom Shares (Bloomberg Television Mar. 12, 2007) (transcript available at http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=OSTK:US&sid=aEOpTqmLZB7A); People & Power: Rigged Markets(Al Jazeera Network May 20, 2007).
65. See, e.g., Jonathan Fowler, Ripley: Believe It Or Not: 70M Shares TradeAfter Michigan Man Puts Them All in Sock Drawer, FINANCIALWIRE, Mar. 4, 2005, http://www.accessmylibrary.com/coms2/summary_0286-18988950_ITM; Thiel, Who’s Behind Naked Shorting?, supra note 36.
66. Global Links Corp., Schedule 13D, at 3-4 (Feb. 3, 2005), available at http://www.sec.gov/Archives/edgar/data/949728/000101540205000967/doc1.txt.
67. Thiel, supra note 36.
68. Depository Trust & Clearing Corp., Media Statement on Global Links, (Aug. 31, 2006), available at <http://www.dtcc.com/ThoughtLeadership/keyissues/global_links.htm?shell=false. See also Thiel, supra note 36 (noting that factors besides naked shorting could have caused the trading volume in Global Links; for example, the company has a “huge overhang of preferred shares convertible to common stock”).
69. See, e.g., James W. Christian, et al., Naked Short Selling: How Exposed Are Investors?, 43 HOUS. L. REV. 1033, 1035 (2006).
70. Liz Moyer, Attack on Pegasus, FORBES.COM, Oct. 3, 2006, http://www.forbes.com/2006/10/02/pegasus-attacks-shorts-bizcx_lm_1003pegasus_print.html.
71. Mike W. Thomas, Two San Antonio Firms Claim Fraud Stinging Stock, SAN ANTONIO BUS. J., Feb. 2, 2004.
72. See Hyperdynamics Corp. v. Southridge Capital Mgmt., No. 05-CV-1953, 2005 WL 1861231 (S.D. Tex. filed June 3, 2005).
73. Bethany McLean, Overstock’s Phantom Menace, FORTUNE, Nov. 1, 2005, available at http://money.cnn.com/2005/11/01/news/midcaps/overstock_fortune_111405/.
74. See, e.g., Barr, supra note 14 (quoting Wes Christian).
75. Three Houston-based class-action firms, for example, expect to file approximately fifty naked short-selling lawsuits in 2007. See id.
76. 1975 WL 359 at *6 (S.D.N.Y. Mar. 12, 1975).
77. Section 10(b) of the Exchange Act makes it unlawful for any person “[t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j (b).
78. Rule 10b-5 states, “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in the light of circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5.
79. E.g., Halperin v. eBankerUSA.com, Inc., 295 F.3d 352, 356-57 (2d Cir. 2002); Kalnit v. Eichler, 264 F.3d 131, 138 (2d Cir. 2001); Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 173 (3d Cir. 2001).
80. E.g., ATSI Communications, Inc. v. Shaar Fund Ltd., 493 F.3d 87, 105-06 (2d Cir. 2007).
81. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976).
82. See Schnell v. Conseco, Inc, 43 F. Supp. 2d 438, 448 (S.D.N.Y. 1999); Global Intellicom v. Thomson Kernaghan & Co., 1999 WL 544708, *7 (S.D.N.Y. July 27, 1999).
83. See Simpson v. AOL Time Warner, 452 F.3d 1040, 1047 (9th Cir. 2006); Verona Partners, LLC v. Tenet Capital Partners Convertible Opportunities Fund, LP, 2006 WL 2669035 (N.D.Cal. Sept. 18, 2006).
84. See GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189, 206-11 (3d Cir. 2001).
85. Id. at 207.
86. 47 F.3d 857, 864-65 (7th Cir. 1995).
87. See Knepper, supra note 4, at 414.
88. Id. at 416.
89. Id.
90. See, e.g., In re Daou Sys. Inc. Sec. Litig., 411 F.3d 1006, 1014 (9th Cir. 2005).
91. E.g., NYSE Rule 440C.10; NASD Rule 3370. Note that as of July 2007, FINRA rules include both the NASD rules and certain incorporated NYSE rules. See http://www.finra.org/RulesRegulation/FINRARules/index.htm.
92. U.S. CONST. art. III, §2.
93. E.g., Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992).
94. Kaplan v. Utilicorp United, Inc., 9 F.3d 405, 407 (5th Cir. 1993).
95. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730-31 (1975).
96. Section 10(b) protects corporations as well as individuals who are sellers of a security, but the corporation must have been an “active market participant.” E.g., Endovasc, Ltd., v. J.P. Turner & Co., 2004 WL 634171 at *12 (S.D.N.Y. Mar. 30, 2004). See also Log On America, Inc. v. Promethean Asset Mgmt. L.L.C., 223 F. Supp. 2d 435, 446 (S.D.N.Y. 2001).
97. Endovasc Ltd., v. J.P. Turner & Co., 2004 WL 634171 at *12 (S.D.N.Y. Mar. 30, 2004) (citing Global Intellicom, 1999 U.S. Dist. LEXIS 11378 at *26; Log On America v. Promethean Asset Management, LLC, 223 F. Supp. 2d 435, 446 (S.D.N.Y. 2001)).
98. Celarier, supra note 4 (citing analysis by Owen Lamont, financial professor at the Yale School of Management).
99. See Dura Pharmaceuticals, Inc. v. Broudo, 125 S. Ct. 1627 (April 19, 2005) (requiring plaintiffs in securities fraud cases to show a direct link between a company’s alleged misrepresentations and a subsequent loss in stock value).
100. See, e.g., Culp & Heaton, supra note 52, at Part III.
101. 363 F.3d 223 (4th Cir. 2004) (affirming 101 F. Supp. 2d 395 (D.S.C. 2000).
102. Id. at 225.
103. Id. at 227.
104. Id. at 233.
105. Id. at 234-35.
106. See id. at 230-31 (citing Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 734 (1975)).
107. 453 F. Supp. 2d 807, 827 (S.D.N.Y. 2006).
108. Id. (citing Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 346-48 (2005)).
109. Id. n.8.
110. 15 U.S.C. § 78bb(f)(1)-(2) (2006); see also Anderson v. Merrill Lynch Pierce Fenner & Smith, Inc., 521 F.3d 1278, 1287-88 (10th Cir. 2008) (affirming dismissal, on SLUSA grounds, of a class action suit claiming naked shorting as market manipulation).
111. 544 U.S. 336.
112. 551 U.S. 308 (June 21, 2007). 22 NYU JOURNAL OF LAW AND BUSINESS [Vol. 5:1
113. Jag Media Holdings, Inc. v. A.G. Edwards & Sons, 387 F. Supp. 2d 691, 703 (S.D. Tex. 2004) (citations omitted).
114. Id.
115. Id.
116. Id.
117. Id.
118. FED. R. CIV. P. 9(b).
119. Jag Media Holdings, Inc., 387 F. Supp. 2d at 703 (citing Hernandez v. Ciba-Geigy Corp. USA, 200 F.R.D. 285, 290 (S.D. Tex. 2001)).
120. E.g., Internet Law Library, Inc. v. Southridge Capital Mgmt., 223 F. Supp. 2d 474, 486 (S.D.N.Y. 2002).
121. 15 U.S.C. § 78u-4(b)(1).
122. 15 U.S.C. § 78u-4 (b)(2).
123. 15 U.S.C. § 78u-4(b)(3)(B).
124. See, e.g., Kelleher, supra note 8. 24 NYU JOURNAL OF LAW AND BUSINESS [Vol. 5:1
125. Naked Short Selling and the Stock Borrow Program, Depository Trust and Clearing Corp., Mar. 2005, at 6, 7, 11, available at http://www.dtcc.com/news/newsletters/dtcc/2005/mar/mar05@dtcc.pdf.
126. Press Release, DTCC Supports SEC Initiative to Make Trade Failure Data Publicly Available (June 19, 2007), http://www.dtcc.com/news/press/releases/2007/trade_failure_data.php.
127. See Kevin Kelleher, Naked Before Byrne, THESTREET.COM, Aug. 18, 2005, http://www.thestreet.com/tech/kevinkelleher/10238633.html.
128. E.g., In re Cabletron Sys., Inc., 311 F.3d 11, 24 n.6, 28-31 (1st Cir. 2002).
129. Some experts suggest employee attrition rates of up to 85% within four years of hiring. See, e.g., Michelle Leder, Training Brokers Not to Flunk Out, REGISTERED REP., Nov. 1, 2002, http://registeredrep.com/certification/finance_training_brokers_not/.
130. 495 F.3d 753 (7th Cir. 2007).
131. Id. at 757.
132. Id. 756-57.
133. Id. at 757 (“Perhaps these confidential sources have axes to grind. Perhaps they are lying. Perhaps they don’t even exist.”)
134. See Barr, supra note 14 (citing Georgetown University Professor James Angel).
135. Every circuit court of appeals that has considered the issue of whether reckless behavior is sufficient for civil liability under section 10(b) and Rule 10b-5 has held that a plaintiff may meet the scienter requirement by showing that the defendant acted intentionally or recklessly. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 2507 n.3. The degree of recklessness required, however, differs among the circuits, and the Supreme Court has not yet addressed the issue. Id.
136. In crafting the PSLRA, Congress did not clarify what facts suffice to create a strong inference of scienter, thus leaving this issue to the courts. Id. at 2509.
137. CompuDyne Corp. v. Shane, 453 F. Supp. 2d 807, 819-20 (S.D.N.Y. 2006) (citing Dietrich v. Bauer, 76 F. Supp. 2d 312, 329 (S.D.N.Y. 1999)).
138. Id. (citing In re Initial Public Offering Sec. Litig., 241 F. Supp. 2d 281 (S.D.N.Y. 2003)).
139. E.g., In re Syncor Int’l Corp. Sec. Litig., 327 F. Supp. 2d 1149, 1166-67 (C.D. Cal. 2004).
140. 127 S. Ct. at 2504-05.
141. Id. at 2504.
142. Id.
143. Id. at 2504-05.
144. Id. at 2510.
145. 387 F. Supp. 2d 691 (S.D.Tex. 2004).
146. Id. at 694-95.
147. Id. at 696.
148. Id. at 697.
149. Id. at 696-97.
150. Id. at 698.
151. Id. at 700.
152. Id. at 708.
153. Id.
154. See, e.g., Ralph Lambiase, NASAA Conference on Naked Short Selling (Nov. 30, 2005) (transcript on file with NASAA), at 3.
155. Simon, supra note 38.
156. U.S. Securities and Exchange Commission, SEC Division of Market Regulation: Key Points About Regulation SHO, (Apr. 11. 2005), http://www.sec.gov/spotlight/keyregshoissues.htm; see also Depository trust & clearing corp., Media Statement on Robert Shapiro’s Report on Naked Short Sales, http://www.dtcc.com/news/press/releases/2006/shapiro.php (last visited Feb. 11, 2009).
157. Depository Trust & Clearing Corp., Naked Short Selling and the Stock Borrow Program, (Mar. 2005), http://www.dtcc.com/news/newsletters/dtcc/2005/mar/naked_short_selling.php; Simon, supra notes 38;38, 58;58. See also Depository Trust & Clearing Corp., supra note 154 (alleging that failed transactions represent less than one-tenth of one percent of transactions handled by the DTCC).
158. See Jim Brigagliano, Assistant Director for Market Regulation, Sec. Exch. Comm’n., NASAA Conference on Naked Short Selling (Nov. 30, 2005) (transcript on file with NASAA) at 4. Rule 10b-21, finalized in September, 2008, and discussed infra p. 55, clarifies that it is fraudulent for a short seller to deceive his broker about his ability to deliver shares and then ultimately, fail to deliver, but leaves open the questions of what constitutes deception or how deception can be proved.
159. 272 F.3d at 211.
160. ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98-108 (2d Cir. 2007), aff’g 2004 WL 616123 (S.D.N.Y. Mar. 30, 2004).
161. Id.at 98.
162. See id. at 103-04.
163. ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., No. 02 Civ.8726(LAK), 2004 WL 616123, at *3 (S.D.N.Y. Mar. 30, 2004).
164. Id. at * 3 n.7.
165. Id. at *1.
166. ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 101-03 (2d Cir. 2007).
167. See id. at 102-03.
168. See id. at 101-03.
169. Id. at 103-104.
170. Pet Quarters, Inc. v. Badian, No. 4:04-CV-697 (RSW), 2007 WL 1020538 (E.D. Ark. Mar. 30, 2007).
171. Id. at *6.
172. Sedona Corp. v. Ladenburg Thalmann & Co., Inc., No. 03CIV3120(LTS)(THK), 2006 WL 2034663 (S.D.N.Y. July 19, 2006).
173. Id. at *4.
174. Id. at *4 (citing Rombach v. Chang, 355 F.3d 164, 176 (2d Cir. 2004)).
175. Id. at *4.
176. 223 F. Supp. 2d 474, 486 (S.D.N.Y. 2002).
177. Id.
178. Id.
179. Jones v. Intelli-check, Inc., 274 F. Supp. 2d 615, 629 (D.N.J. 2003).
180. Internet Law Library, Inc. v. Southridge Capital Mgmt., 2003 WL 21537782 at *5 (S.D.N.Y. July 8, 2003).
181. Tellabs, 127 S. Ct. at 2509.
182. See, e.g., Matthew McClearn, Predator or Prey: The Mysterious World of Death-Spiral Finance, TORONTO STAR, Oct. 15, 2002, at B1, available at http://www.rgm.com/articles/predatororprey.html.
183. See, e.g., Sedona Corp. v. Ladenburg Thalmann & Co., Inc., et al., No. 03CIV3120(LTS)(THK), 2006 WL 2034663 (S.D.N.Y. July 19, 2006); Matthew McClearn, Predator or Prey: The Mysterious World of Death-Spiral Finance, TORONTO STAR, Oct. 15, 2002, at B1, available at http://www.rgm.com/articles/predatororprey.html;
184. 15 U.S.C. §§ 77p(b)-(c), 78bb(f)(1)-(2) (2006).
185. Press Release, Depository Trust & Clearing Corp., Media Statement on Robert Shapiro’s Report on Naked Short Sales (Mar. 15, 2006), http://www.dtcc.com/news/newsletters/dtcc/2005/mar/naked_short_selling.php.
186. Depository Trust and Clearing Corp., Naked Short Selling and the Stock Borrow Program, Mar. 30, 2005, http://www.dtcc.com/news/newsletters/dtcc/2005/mar/naked_short_selling.php
187. Filed Jan. 31, 2003, dismissed Mar. 17, 2004. DTCC, Naked Short Selling Cases, http://www.dtcc.com/leadership/issues/nss/cases.php (last visited Jan. 22, 2009).
188. Filed Nov. 14, 2003 in U.S. District Court for the District of Nevada; dismissed Nov. 9, 2004. DTCC, Naked Short Selling Cases, http://www.dtcc.com/leadership/issues/nss/cases.php (last visited Jan. 22, 2009).
189. Filed Jan. 2006; DTCC not served; DTCC defendants dropped from litigation. DTCC, Naked Short Selling Cases, http://www.dtcc.com/leadership/issues/nss/cases.php (last visited Jan. 22, 2009). (Filed Jan. 2006; DTCC not served; DTCC defendants dropped from litigation).
190. Filed Mar. 10, 2003; never served on DTCC); DTCC, Naked Short Selling Cases, http://www.dtcc.leadership.issues/nss/cases.php (last visited Jan. 18, 2009).
191. Filed Mar. 21, 2003; dismissed voluntarily by plaintiffs as against DTCC, with prejudice, May 18, 2004. Dismissed as against remaining DTCC defendants, July 30, 2004. DTCC, Naked Short Selling Cases, http://www.dtcc.leadership.issues/nss/cases.php (last visited Jan. 18, 2009).
192. Capece v. Elgindy, No. 04-CV-80403 (S.D. Fla. filed Apr. 28, 2004; dismissed voluntarily by plaintiff as against DTCC defendants, Aug. 3, 2004). DTCC, Naked Short Selling Cases, http://www.dtcc.leadership.issues/nss/cases.php (last visited Jan. 18, 2009).
193. Intergold, Inc. Action; filed Feb. 18, 2003; dismissed by court on DTCC Defendants’ motion to dismiss, Oct. 3, 2003. DTCC, Naked Short Selling Cases, http://www.dtcc.leadership.issues/nss/cases.php (last visited Jan. 18, 2009).
194. Petrogen Corp. action; filed Feb. 25, 2003; dismissed by court on DTCC Defendants’ motion to dismiss; Sept. 5, 2003. DTCC, Naked Short Selling Cases, http://www.dtcc.leadership.issues/nss/cases.php (last visited Jan. 18, 2009).
195. Filed Aug. 30, 2004; dismissed by court on DTCC motion to dismiss (no opposition filed), Dec. 7, 2004. DTCC, Naked Short Selling Cases, http://www.dtcc.leadership.issues/nss/cases.php (last visited Jan. 18, 2009).
196. 168 P.3d 73 (Nev. 2007).
197. Complaint, Nanopierce Technologies, Inc. v. Depository Trust and Clearing Corp., 2004 WL 3629226 (Nev. Dist. Ct. Apr. 29, 2004) (No. 04-01079).
198. 168 P.3d at 76.
199. Id. at 84.
200. Brief for Securities and Exchange Commission as Amici Curie Supporting Defendants, Nanopierce Technologies, Inc. v. Depository Trust and Clearing Corp., 168 P.3d 73 (Nev. 2007) (No. 45364), available at http://www.404.gov/litigation/briefs/nanopiercesecbrief.pdf.
201. Nanopierce Technologies, Inc. v. Depository Trust and Clearing Corp., No. 04-01079, 2005 WL 4712388 (Nev. Dist. Ct. Apr. 28, 2005).
202. 168 P.3d 73.
203. USDCData.com,http://www.usdcdata.com/CACD/2/2004/cv06417. Alan_R_Sporn_v._Amr_I_Elgindy_et_al/DS_1_04064171.html (Filed Aug. 3, 2004; dismissed by court on DTCC motion to dismiss, July 25, 2005; sanctions awarded against plaintiffs; plaintiffs appealing to 9th Circuit).
204. Id.
205. Id.
206. Id.
207. Id.
208. No. 05-80498 CIV RYSKAMP, 2005 WL 4050118 (S.D. Fla. Oct. 11, 2005).
209. Id. at *1.
210. Id.
211. Id. at *3.
212. Id. at *9.
213. 539 F.3d 1159 (9th Cir. 2008).
214. Id; see also Whistler Invs., Inc. v. The Depository Trust and Clearing Corp., No. CV-S-05-0634-RCJ (D.Nev. June 1, 2006); Depository Trust and Clearing Corp., Federal Court Dismisses Lawsuit Against DTCC, June 2, 2006, available at http://www.dtcc.com/news/press/releases/2006/whistler.php.
215. 539 F.3d at 1167; see also Whistler Invs., Inc. v. The Depository Trust and Clearing Corp., No. CV-S-05-0634-RCJ (D. Nev. June 1, 2006).
216. 545 F. Supp. 2d 845 (E.D.Ark. 2008).
217. Id. at 851.
218. Id. at 848-49.
219. See id.
220. Id. at 853.
221. See Depository Trust & Clearing Corporation, Our Business: An Overview, http://www.dtcc.com/about/business/index.php.
222. Complaint, In re Short Sale Antitrust Litigation, No. 06-CV-2859 (S.D.N.Y. Apr. 12, 2006). Electronic Trading Group’s lawsuit was followed a few days later by a nearly identical suit brought by another hedge fund, Quark Fund, LLC.
223. Id. at 2.
224. See id. at 11.
225. 15 U.S.C. § 1.
226. See Complaint, In re Short Sale Antitrust Litigation, No. 06-CV-2859 (S.D.N.Y. Apr. 12, 2006).
227. 127 S. Ct. 2383 (2007).
228. Defendants’ Supplemental Brief Re: The Supreme Court’s Decision in Credit Suisse Securities (USA) LCC v. Billing at 1, In re Short Sale Antitrust Litigation, No. 06-CV-2859 (S.D.N.Y. Aug. 7, 2007).
229. Id. (citing Billing at 2395-6).
230. 127 S. Ct. at 2388-89.
231. Id. at 2395-97.
232. Id. at 2387.
233. In re Short Sale Antitrust Litig. (Electronic Trading Group), 527 F. Supp. 2d 253, 260 (S.D.N.Y. 2007).
234. Id. at 260.
235. Id.
236. Id. at 262.
237. Barr, supra note 14 (citing Barry Barbash).
238. See Press Release, SEC, SEC Issues New Rules to Protect Investors Against Naked Short Selling Abuses, No. 2008-204 (Sept. 17, 2008), available at http://www.sec.gov/news/press/2008/2008-204.htm; SEC Rule 10b-21, Exchange Act Release No. 34-57511; 73 Fed. Reg. 15376 (proposed Mar. 21, 2008) (to be codified at 17 C.F.R. pt. 240).
239. 529 F. Supp. 2d 444 (S.D.N.Y. 2008).
240. See Complaint at 1, Lyon, 529 F. Supp. 2d 444 (No. 06-CV-14338).
241. Id. at 2.
242. Id.
243. Id. at 5.
244. Id.
245. Id. at 6.
246. Lyon, 529 F. Supp. 2d at 446-47.
247. SEC Press Release, SEC Files Settled Enforcement Action Against Broker-Dealer Friedman, Billings, Ramsey & Co., Inc., No. 2006-214 (Dec. 20, 2006), available at http://www.sec.gov/news/press/2006/2006-214.htm.
248. Liz Moyer, Piped Again by the SEC, FORBES.COM, Dec. 20, 2006, http://www.forbes.com/business/2006/12/20/pipes-sec-insider-trading-biz-cx_lm_1220pipes.html.
249. SEC v. Badian, No. 06-CV-2621, 2006 WL 1432080, at 1 (S.D.N.Y. Apr. 4, 2006), Complaint available at http://www.sec.gov/litigation/complaints/2006/comp19639.pdf.
250. See id.
251. See id.
252. See id. ¶¶ 1-2, 25-30.
253. Compl. at 6-7, Overstock.com, Inc. v. Gradient Analytics, Inc., No. CV-053693 (Cal. Super. Ct. Aug. 11, 2005), available at http://cdn.overstock.com/05-0811_CivilComplaint_NSS.pdf.
254. Barr, supra note 14. 255. Overstock.com, Inc. v. Gradient Analytics, Inc., No. CV-053693 (Cal. Super. Ct. Mar. 7, 2006) (ruling on Gradient’s motion to dismiss), available at http://cdn.overstock.com/06-0307_FinalMotionRuling_NSS.pdf.
256. Press Release, Gradient Analytics, Gradient Analytics Looks Forward to Jury Trial in Overstock.com Case (June 23, 2008), available at http://www.gradientanalytics.com/news/GA%20Trial%20Date%2020080623.pdf.
257. Liz Moyer, Naked Justice?, FORBES.COM, Aug. 29, 2006, http://www.forbes.com/2006/08/29/naked-shorts-sedona-louisiana-cx_lm_0829naked_print.html.
258. Id.
259. Id.
260. Compl. at 1, Overstock.com, Inc. v. Morgan Stanley & Co., Inc., No. CGC-07-460147 (Cal. Super. Ct. July 6, 2007), available at http://cdn.over stock.com/07-0202_LegalDoc_PRIME.pdf.
261. See Overstock.com Press Release, Overstock.com Wins Ruling in Prime Brokerage Litigation, July 18, 2007, available at http://investors.overstock.com/phoenix.zhtml?c=131091&p=irol-newsArticle&ID=1027457&highlight=.
262. Final Rule: Short Sales, Release No. 34-50103, 7 C.F.R. 240-42 (2004), available at http://www.sec.gov/rules/final/34-50103.htm. For a detailed discussion of Regulation SHO’s provisions, see Dickerson, supra note 31. Note that SHO is short for “SHOrt selling.”
263. Rule 202T creates a pilot program through which the SEC may temporarily suspend all price tests for investors’ securities short sales for certain designated securities so that ultimately, the SEC may determine the most effective price test for short sales. For a more thorough discussion of this provision, which is beyond the scope of this paper, see Dickerson, supra note 31, at 184-85.
264. The SEC had last updated short-selling regulations in 1938.
265. SEC. & EXC. COMM’N, DIVISION OF MARKET REGULATION: RESPONSES TO FREQUENTLY ASKED QUESTIONS CONCERNING REGULATION SHO, Oct. 11, 2006, available at http://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm.
266. Final Rule: Short Sales, Exchange Act Release No. 34-50103 at 11. Generally, “easy to borrow” stocks are highly capitalized, with large numbers of shares in circulation. MARK JICKLING, REGULATION OF NAKED SHORT SELLING, CRS Report for Congress, Mar. 30, 2005 at 3. Note, however, that if a security included on an “Easy to Borrow” list suffers repeated delivery failures, reliance on the list no longer provides reasonable grounds for the broker-dealer to believe it will be obtained. Philip Dickerson, Regulation SHO, 24 ANN. REV. BANKING & FIN. L. 181, 185 (2005) (citing Final Rule: Short Sales, Exchange Act Release No. 34-50103 at 12).
267. Final Rule: Short Sales, Exchange Act Release No. 34-50103 at 14. See also Thiel, supra note 63.
268. Final Rule: Short Sales, Securities Exchange Act Release No. 34-50103 at 14. See also Marie Leone, SEC Releases Reg. SHO Amendments, CFO.COM, July 13, 2006, http://www.cfo.com/printable/article.cfm/7180899/c_7161792?f=options.
269. Final Rule: Short Sales, Exchange Act Release No. 34-50103 at 16. See also Leone, supra, note 268.
270. Final Rule: Short Sales, Exchange Act Release No. 34-50103 at 16.
271. A person shall be deemed to own a security if he: (1) or his agent has title to it; or (2) has purchased, or has entered into an unconditional contract, binding on both parties thereto, to purchase it, but has not yet received it; or (3) owns a security convertible into or exchangeable for it and has tendered such security for conversion or exchange; or (4) has an option to purchase or acquire it and has exercised such option; or (5) has rights or warrants to subscribe to it and has exercised such rights or warrants; or (6) holds a security futures contract to purchase it and has received notice that the position will be physically settled and is irrevocably bound to receive the underlying security. Id. at 41. Note also that “a person shall be deemed to own securities only to the extent that he has a net long position in such securities.” Id.
272. Id. at 13.
273. See Thiel, supra note 63 (quoting Sen. Robert Bennett (R-UT); see also Of Stocks and Socks: Senator Bennett Bores In On SEC’s Dismal Naked Short SalesRecord, FINANCIALWIRE, Mar. 14, 2005, at 1.
274. Marie Leone, supra note 268.
275. See 15 U.S.C. 78c(a)(38) (2007). MARK JICKLING, REGULATION OF NAKED SHORT SELLING, CRS REPORT FOR CONGRESS, Mar. 30, 2005, at CRS-3, note 4. (“[Market-makers] are the key intermediaries on the NASDAQ; on the New York Stock Exchange, they are called specialists.”)
276. Thiel, supra note 36;36.
277. Id.
278. SEC Rule 200(h), 17 C.F.R. § 242.200 (2009).
279. See, e.g., NYSE Regulation, Threshold Securities, http://www.nyse.com/RegulationFrameset.html?displayPage http://www.nyse.com/threshold/home.html (“From time to time, upon application from a NYSE specialist to continue to fulfill its obligation to maintain a fair and orderly market pursuant to NYSE Rule 104, a temporary exemption from the close out and/or borrowing requirements of Regulation SHO, 17CFR 242.203 (b)(3), may be recommended by the New York Stock Exchange and granted to the NYSE specialist in the security, by the Securities and Exchange Commission. The temporary exemption would normally last no longer than 30 days but may be renewed, depending upon the particular circumstances. The fact that a NYSE specialist has been granted an exemption will initially remain confidential to protect the NYSE specialist’s position in the subject security.”).
280. Kelleher, supra note 8;8.
281. Id.
282. See SEC Release 34-56212, 17 CFR Part 242 (Aug. 7, 2007), 73 Fed. Reg. 45544 (Aug.14, 2007), available at http://www.sec.gov/rules/final/2007/34-56212fr.pdf.
283. See id.
284. Naked Short Selling, THE FINANCIAL TIMES, July 6, 2006.
285. See, e.g., SEC Response to Freedom of Information Act Request No. 05-05810-FOIA (June 22, 2005), available at http://www.thesanitycheck.com/Portals/0/FOIANYSE.pdf; John W. Welborn, Married Puts, Reverse Conversions,and Abuse of the Options Market Maker Exception on the Chicago Stock Exchange (2007), available at http://antisocialmedia.net/media/2007.10.09%20(J%20Welborn)%20Married%20Puts%20and%20Reverse%20Conversions.pdf; John W. Welborn, The ‘Phantom Shares’ Menace, Regulation 52, 54-50 NYU JOURNAL OF LAW AND BUSINESS [Vol. 5:1 56 (Spring 2008), available at http://www.cato.org/pubs/regulation/regv31n1/v31n1-7.pdf; see also, e.g., Letter from Thomas Vallarino, investor, to Nancy M. Morris, Secretary, Securities and Exchange Commission (Mar. 15, 2007), available at http://www.sec.gov/comments/s7-12-06/s71206-466.pdf.
286. Thiel, supra note 63.
287. Barr, supra note 14.
288. Dean Foust, Why the Shorts Have Long Faces, BUS. WK., Feb. 28, 2005, at 86, cited in MARK JICKLING, REGULATION OF NAKED SHORT SELLING, CRS REPORT FOR CONGRESS, at 4 (2005).
289. Id.
290. Thiel, supra note 63.
291. See SEC Release 34-56212, 17 CFR Part 242 (Aug. 7, 2007), 73 Fed. Reg. 45544 (Aug.14, 2007), available at http://www.sec.gov/rules/final/2007/34-56212fr.pdf.
292. Christopher Cox, Chairman, Securities and Exchange Commission, Opening Statements at the Commission Open Meeting (July 12, 2006), available at http://www.sec.gov/news/speech/2006/spch071206cc2.htm.
293. Emergency Order Taking Temporary Action to Respond to Market Developments, Exchange Act Release No. 34-58572, 73 Fed. Reg. 54875 (Sept. 17, 2008), available at http:// www.sec.gov/rules/other/2008/34-58572.pdf. See also Cox, supra note 292. Press Release, SEC, SEC Votes on Regulation SHO Amendments and Proposals; Also Votes to Eliminate Tick Test (June 13, 2007), available at http://www.sec.gov/news/press/2007/2007-114.htm.
294. Emergency Order Taking Temporary Action to Respond to Market Developments, Exchange Act Release 34-58572, 73 Fed. Reg. 54875 (Sept. 17, 2008), available at http://www.sec.gov/rules/other/2008/34-58572.pdf.
295. “Naked” Short Selling Anti-Fraud Rule, Exchange Act Release No. 34-57511, 73 Fed. Reg. 15376 (proposed Mar. 21, 2008), available at http://www.sec.gov/rules/proposed/2008/34-57511.pdf. For a thorough discussion of this proposed rule, see Alexis B. Stokes & Peter A. Stokes, Naked No More? An Assessment of Proposed SEC Rule 10b-21, 22 J. TAX’N. & REG. FIN. INST. 14 (2008).
296. Press Release, SEC, SEC Issues New Rules to Protect Investors Against Naked Short Selling Abuses (Sept. 17, 2008), available at http://www.sec.gov/news/press/2008/2008-204.htm.
297. SEC Release 34-58572 (Sept. 17, 2008), 73 Fed. Reg. 54875 (Sept. 23, 2008), available at www.sec.gov/rules/other/2008/34-58572.pdf.
298. Press Release, SEC, SEC Issues New Rules to Protect Investors Against Naked Short Selling Abuses (Sept. 17, 2008), available at http://www.sec.gov/news/press/2008/2008-204.htm.
299. See SEC Release 34-57511, 73 Fed. Reg. 15,376 (Mar. 21, 2008), available at http://www.sec.gov/rules/proposed/2008/34=57511.pdf.
300. Press Release, SEC, SEC Issues New Rules to Protect Investors Against Naked Short Selling Abuses (Sept. 17, 2008), available at http://www.sec.gov/news/press/2008/2008-204.htm.
301. SEC Release 34-58572 (Sept. 17, 2008), 73 Fed. Reg. 54,875 (Sept. 23, 2008), available at http://www.sec.gov/rules/other/2008/34-58572.pdf.
302. Id.
303. SEC Release 34-58591 (Sept. 18, 2008), 73 Fed. Reg. 55175 (Sept. 24, 2008), available at http://www.sec.gov/rules/other/2008/34-58591.pdf (“SEC Release 34-58591”); Press Release, SEC, SEC Approves Amended Order Requiring Reporting of Short Positions by Certain Investment Managers (Sept.21, 2008), available at http://www.sec.gov/news/press/2008/2008-217.htm. Id.
304. See, e.g., FSA Cracks Down on Short Selling, BBC NEWS, June 13, 2008, http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7452312.stm (noting hedge fund manager complaints about required public disclosure of trading strategies in the UK).
305. Press Release, SEC, SEC Approves Amended Order Requiring Reporting of Short Positions by Certain Investment Managers, (Sept. 21, 2008), available at http://www.sec.gov/news/press/2008/2008-217.htm.
306. SEC Release 34-58591 (Sept. 18, 2008), 73 Fed. Reg. 55175 (Sept. 24, 2008), available at http://www.sec.gov/rules/other/2008/34-58591.pdf).
307. Press Release, SEC, SEC Halts Short Selling of Financial Stocks to Protect Investors and Markets (Sept. 19, 2008), available at http://www.sec.gov/news/press/2008/2008-211.htm.
308. FINRA was created in July 2007 through the consolidation of the National Association of Securities Dealers (“NASD”) and the member regulation, enforcement, and arbitration functions of the New York Stock Exchange. FINRA Home Page, http://www.finra.org.
309. FINRA Rule 3370. See also Carol S. Remond & Steve D. Jones, Canadian Regulators Review Naked Short Selling, (Dec. 11, 2002), available at http://www.rgm.com/articles/nakedreview.html.
310. Id.
311. Id.
312. Id.
313. See Interpretation No. 04 to article III, section 1, of the NASD’s Rules of Fair Practice, NASD Manual (CCH) ¶ 2151.04. Richard Geist, New Short Selling Regulations, Bull & Bear Financial Report (accessed Aug. 19, 2005), http://www.thebullandbear.com/articles/2004/_04-print/p-0304-geist.html.
314. Canadian short-selling rules have long contributed to problems for American companies and investors. Canadian law permits naked short-selling in that it does not follow the affirmative determination rule, which would limit short-selling based on the ability to borrow the stock at the time of sale. American investors and issuers thus complain that naked short-selling in Canada can manipulate the stock of American companies. See Remond & Jones, supra note 309.
315. Specialists, as on the New York Stock Exchange, are market professionals who are responsible for making the market in a particular stock. They act as auctioneers by matching the best prices for buyers and sellers.
316. See Remond & Jones, supra note 309.
317. Id.
318. FINRA Rule 3370 (b)(2)(A).
319. See, e.g., MM&S Financial, Inc. v. Nat’l Ass’n of Securities Dealers, Inc., 364 F.3d 908, 911-912 (8th Cir. 2004).
320. See, e.g., Press Release, NASD, NASD’s NAC Upheld Previous Decision; Fraudulent Manipulation and Illegal Short Sales Result in Expulsion of Fiero Bros., Bar of John Fiero and Fine of $1 Million (Oct. 30, 2002), available at http://www.finra.org/PressRoom/NewsReleases/2002NewsReleases/P002884; Press Release, NASD, NASD’s NAC Upheld Previous Decision; Fraudulent Manipulation and Illegal Short Sales Result in Expulsion of Fiero Bros., Bar of John Fiero and Fine of $1 Million (2002), available at http://www.finra.org/PressRoom/NewsReleases/2002NewsReleases/P002884; see also Edgar Ortega, Piper Fined by the NYSE Over Short-Sale Violations, BLOOMBERG.COM (2007), http://www.bloomberg.com/apps/news?pid=newsarchive&sid=afpYSjiXF7iE. 56 NYU JOURNAL OF LAW AND BUSINESS [Vol. 5:1
321. Paul Foy, Utah Gov. Signs Naked Short Selling Bill, ASSOCIATED PRESS (May 26, 2006).
322. The law was originally to have taken effect on October 1, 2006, but was delayed in a settlement with the Securities Industry Association. See Liz Moyer, Utah Governor Caves on Shorts, FORBES.COM (Aug. 11, 2006), available at http://www.forbes.com/business/2006/08/11/naked-shorts-sia-utahcx_lm_0811shorts.html.
323. Foy, supra note 321.
324. Complaint, Securities Industry Assoc. v. Klein, No. 2:06CV00623 DAK (D. Utah July 28, 2006) available at http://www.sia.com/utah_lawsuit/pdf/complaint.pdf.
325. Id.
326. Moyer, supra note 322.
327. Securities Industry and Financial Markets Ass’n, Utah Settlement and Clearing Law Questions and Answers, http://www.sifma.org/regulatory/litigation/utah_lawsuit/html/Q_and_A.html.
328. Id.; see also http://www.sifma.org/regulatory/litigation/utah_lawsuit/html/Q_and_A.html.
329. Id.
330. Id.
331. U.S. CONST. art. I, § 8, cl. 3.
332. Complaint, Securities Industry Assoc. v. Klein, Case No. 2:06CV00623 DAK, filed July 28, 2006, D. Utah, available at http://www.sia.com/utah_lawsuit/pdf/complaint.pdf.
333. See Brice Wallace, House Acts to Put An End to ‘Naked Short Selling’ Bill, DESERET MORNING NEWS, Mar. 1, 2007, available at http://deseretnews.com/article/1,5143,660199597,00.html?pg=1; see also SIFMA Press Release, Utah Legislature Votes to Repeal ‘Fail to Deliver Law’ Challenged by SIFMA (Mar. 1, 2007), available at http://www.sifma.org/news/40455117.shtml.
334. Liz Moyer, Wall Street Wins in Utah, FORBES.COM, Mar. 1, 2007, http://www.forbes.com/business/2007/03/01/naked-shorting-repeal-bizcx_lm_0301naked.html.
335. See SIFMA, Quick Read: Naked Short-Selling, http://www.sifma.org/legislative/state/Naked-Short-Selling.html (last updated Nov. 14, 2008).
336. See Initiated Measure 9, South Dakota Small Investors Protection Act, available at http://www.sdsos.gov/electionsvoteregistration/electvoterpdfs/2008/2008InMeasUniformedSecuritiesAct.pdf.
337. See Letter from Nancy Donohoe Lancia, Vice President State Government Affairs, SIFMA, to Gail Sheppick, Director, South Dakota Securities Division, June 25, 2007, available at http://www.sifma.org/regulatory/comment_letters/47599597.pdf.
338.
339. Investopedia, Custody-Only Trading, http://www.investopedia.com/terms/c/custodyonly.asp (last visited March 20, 2009).
340. SEC Release 34-50758A (Dec. 7, 2004), available at http://www.sec.gov/rules/final/34-50758a.htm.
341. See, e.g., BioCurex, Inc. BioCurex Inc. Announces Company’s Consideration of ‘Certificate Only’ Trading as Part of an Overall Re-Structure Initiative, available at http://www.globenewswire.com/newsroom/news.html?d=35551.
342. See Press Release, JAG Media Holdings, Inc., (Feb. 25, 2005), JAG Media Holdings, Inc. Announces Results of Annual Stockholders Meeting, available at http://www.jagnotes.com/PR2.pdf.
343. OECI to Aggressively Combat Naked Short Selling of OTC Bulletin Board Stocks, MARKETWIRE, Aug. 4, 2003, http://findarticles.com/p/articles/mi_pwwi/is_200308/ai_mark1930545199.
344. See, e.g., Mike W. Thomas, Two San Antonio Firms Claim Fraud Stinging Stock, SAN ANTONIO BUS. J., Jan. 30, 2004 available at http://sanantonio.bizjournals.com/sanantonio/stories/2004/02/02/story1.html (noting that ATSI Communications, Inc. reincorporated in Nevada to “shine a light on” and “squeeze out” naked short sellers because Nevada law requires paper delivery of shares).
345. Barr, supra note 14 (citing Robert Shapiro).
346. Id.
347. Id.
348. Rob Wherry, Wall Street’s Next Nightmare?, FORBES.COM, Oct. 5, 2003, available at http://www.forbes.com/forbes/2003/1013/066.html (quoting John O’Quinn).
http://www1.law.nyu.edu/journals/lawbusiness/issues/uploads/5-1/NYB103.pdf
IN PURSUIT OF THE NAKED SHORT
ALEXIS BROWN STOKES*
From: Jeffrey S. Mitchell
Re: Spring 2009 -- NYU Journal of Law and Business: In Pursuit of the Naked Short (Part 1 of 2)
NEW YORK UNIVERSITY
JOURNAL OF LAW AND BUSINESS
VOL. 5 Spring 2009 No. 1
IN PURSUIT OF THE NAKED SHORT
ALEXIS BROWN STOKES*
Recent lawsuits claiming market manipulation through naked short-selling have failed to produce remedies for the alleged injured parties; no private plaintiff yet has won a final judgment, with damages, based on allegations of naked short-selling. Despite this poor track record, naked short-selling litigation has proliferated in the post-Enron era, as struggling small-cap companies blame naked short-sellers for their sagging stock prices, and with the plaintiffs’ bar pursuing the naked short as a Holy Grail because of the potentially huge damage awards.
This article explores the origins of naked short-selling litigation; considers the failures of significant naked short-selling lawsuits in federal court; surveys the obstacles erected collectively by constitutional standing requirements, the Federal Rules of Civil Procedure, the Private Securities Litigation Reform Act, brokerage firms, death spiral financiers, and the Depository Trust and Clearing Corporation; examines the efficacy of Regulation SHO, SEC rule 10b-21, and new FINRA rules; discusses recent state legislation and state court litigation; and identifies non-litigation options to curb naked short-selling. Ultimately, this article seeks to answer the question: If manipulative naked short-selling is more than a mythological scapegoat for small cap failure, what remedies are, or should be, available?
* J.D., Harvard Law School; B.A., Rice University. The author thanks both Peter Stokes and participants at the University of Florida’s Huber Hurst Research Seminar, co-sponsored by and held at The University of Pennsylvania’s Wharton School of Business in February 2007, for their comments and support. An earlier version of this paper was also presented at The Academy of Legal Studies in Business Annual Conference in August 2007. The author also notes that although, as a junior associate, she formerly served among the many defense co-counsel in one of the cases, Jag Media Holdings v. A.G. Edwards & Sons, Inc., 387 F.Supp.2d 691 (S.D.Tex. 2004), cited herein, the views expressed are solely the author’s and do not necessarily reflect those of her former law firm or clients.
INTRODUCTION
“The court was not astonished to learn from counsel that the practice of selling short naked is rather less fun than might be imagined.”1
Recent lawsuits claiming market manipulation through naked short-selling have failed to produce remedies for the alleged injured parties; no private plaintiff yet has won a final judgment, with damages, based on allegations of naked shortselling. Despite this poor track record, naked short-selling litigation has proliferated in the post-Enron era as struggling small-cap companies blame naked short-sellers for their sagging stock prices and the plaintiffs’ bar continues to pursue these claims because of the potentially huge damage awards. This article explores the origins of naked short-selling litigation; considers the failures of significant naked short-selling lawsuits in federal court; surveys the obstacles erected collectively by constitutional standing requirements, the Federal Rules of Civil Procedure, the Private Securities Litigation Reform Act, brokerage firms, death spiral financiers, and the Depository Trust and Clearing Corporation; examines the efficacy of Regulation SHO, SEC rule 10b-21, and FINRA rules; discusses recent state legislation and state court litigation; and identifies non-litigation options to curb naked short-selling. Ultimately, this article seeks to answer the question: If manipulative naked short-selling is more than a mythological scapegoat for small-cap failure, what remedies are, or should be, available?
Part I of this article provides context for understanding the naked short-selling phenomenon. Part II examines the popularization of the naked short as a scapegoat for corporate failures. Part III explores the proliferation of lawsuits alleging naked short-selling and focuses on the injusticiability of market manipulation through naked short-selling claims. Part IV previews trends in naked short-selling litigation. Part V considers current and proposed regulatory and legislative solutions to the naked short-selling problem.
I. NAKED SHORT-SELLING, DEFINED
In a typical securities transaction, an investor purchases a stock, waits for the stock price to increase, and then sells the stock at a profit. In securities lingo, this “buy low, sell high” behavior is called “selling long.” The investor’s risk is limited to the purchase price of the stock.
Sometimes an investor adopts a “sell high, buy low” strategy through a “short sale” instead. The investor, suspecting that a stock is overvalued and will decrease, borrows the stock (usually from a broker or institutional investor), sells it, waits for the price to decline, purchases the stock at the lower price to return to the lender, and pockets the difference in price as profit.2 For example, an investor believes that Company ABC, which is currently trading at $50 a share, is overvalued and that the stock price will decline. The investor borrows 100 shares of ABC stock at $50 a share from his broker3 and immediately sells them for $5000. The investor waits, and when ABC’s stock declines to $30 a share, he buys 100 shares on the open market for $3000 and returns them to his broker. The investor reaps a profit of $2000 on this short sale. The risk, of course, is that if Company ABC’s stock price increases instead of decreases, the investor’s loss is potentially infinite.4
As long as the short sale is not used to manipulate the price of a stock,5 it is generally considered a legal, non-fraudulent market tool in the United States.6 As Judge Richard Posner has noted:
For every short seller—a pessimist about the value of the stock that he’s selling short—there is, on the other side of the transaction, an optimist, who thinks the stock worth more than the short-sale price. Unless the shorts are trading on insider information, all that a large volume of short selling proves is a diversity of opinions about the company’s future. . . .Of course, if there were more pessimists, all wanting to sell short, than there were optimists, the price of a stock would plunge; but the important thing would not be the short selling, but the price plunge, and we made clear in our previous opinion that a price plunge, without more, is not a reasonable basis for suspecting fraud.7
Moreover, most American market watchers claim that short selling can be a beneficial market correction device in that it “weeds weak and fraudulent companies from the field,”8 and that by identifying “companies and industries that are overvalued by investors in the grip of irrational exuberance. . . . [and] by bringing such valuations down to earth, short selling can prevent economically wasteful over-allocation of resources.”9 Further, “selling the stock of a badly managed company to a less-thoughtful investor is [a] fair—if brutal— game in a market where stupidity is a sin.”10 Short selling may also help provide liquidity when shares of securities are needed in rapid supply.11 Finally, short-selling may act as a necessary “counterweight” to fraudulent run-ups aimed at artificially inflating stock prices.12 However, controversy arises when the short sales are “naked”—when the investor makes no effort to cover the stock he has sold13 and instead essentially creates phantom shares.14
In a naked short sale, the investor identifies a stock that is overvalued and likely to decline in price. Unlike a typical short sale, however, the investor then sells shares of that stock that he does not own or borrow and does not intend to own or borrow.15 One commentator characterizes naked short-selling as “make believe short-selling. In the same way kids play doctor without the medical equipment, naked shorters sell unborrowed stocks—stocks that no one has borrowed and possibly never will.”16
So how can an investor sell stock he does not possess?
Enter the role of the Depository Trust & Clearing Corporation (“DTCC”), a financial services company that clears and settles securities trades and provides custody of securities.17 The DTCC processes most of the securities transactions in the United States, which amounted to over $1.86 quadrillion in 2007.18 The DTCC’s mission is to provide an efficient and safe mechanism for buyers and sellers to make their exchanges without the burden of exchanging paper certificates every time a stock is traded.19 The DTCC is not a regulatory body, however; instead it is overseen by the Securities and Exchange Commission (“SEC”).20
The SEC requires that investors complete, or settle, their securities transactions within three business days of the sale.21 If the seller does not deliver the stock certificates to the brokerage firm within this “T+3” (trade date plus three days) period, 22 the DTCC issues a “fails to deliver” (“FTD”), which is the securities equivalent of an “IOU.”23 Although they are not “perfect substitutes for real shares of the issuer’s stock,”24 these FTDs have economic value25 to the buyer whose account is credited with a long position. The naked short sale thus takes advantage of a system that allows a transaction to occur, and all moneys to be paid, before delivery occurs.26 A stock sale can be processed and affect the share price, but the delivery portion of the transaction may never occur.27 Market players merely trade the FTD and in the short term, at least, the paper shares are not missed by anyone except, perhaps, the DTCC, which maintains records of delivery obligations.
Meanwhile, broker-dealers and banks credit customer accounts prior to the delivery of the securities, which may never arrive.28 The result is that a share of stock can be figuratively duplicated, sometimes multiple times, and can be owned by multiple investors,29 creating an artificial oversupply of the stock.30 With the oversupply, the stock price usually falls.31 For small- and micro-cap companies, especially, these stock price plunges can affect their ability to attract investors, raise capital, and negotiate financing.32
Allegedly, this is often the destiny of small-cap, thinlytraded, financially-challenged companies that utilize floorless, future-priced convertible financing, also known as “toxic” or “death spiral” financing, in which they accept money on unfavorable terms.33 The lender acquires the right to convert debt to stock at variable, below-market prices, and the lower the stock price, the more shares the lender gets on conversion.34 If the lender can manipulate the stock price downward, it can convert the debt to more stock and gain a greater share of control in the company.35 The original shareholders stand to lose most or all of their stake in the company if the lenders short as many shares as possible, take their profit, and then wait as the stock price continues to fall with the aim of acquiring enough shares upon conversion to cover the shorts.36 Thus, the lender has an incentive to encourage or participate in naked shorting of the company’s stock, which could theoretically drive down the stock price to the point where the company loses viability and collapses.37
That’s the theory. In reality, Wall Street players and the DTCC dispute both the extent to which naked short selling actually occurs and the extent to which it is harmful.38 For example, although Robert Shapiro, former Under Secretary of Commerce and currently a plaintiff’s consultant in naked short-selling litigation, contends that there are now about a half-billion shares in the United States that have been sold but not delivered for settlement in the required three days39 and that short selling has cost investors $100 billion and caused 1,000 companies to collapse.40 Meanwhile, another market commentator notes that “Wall Street’s best connected investors say naked shorting is as uncommon as an investment bank managing director who drives a Kia.”41 Still others note that if naked short-selling were really prevalent, “somewhere along the chain, people would be hurting. For example, brokers, having to make their clients whole, would be kicking up a tremendous fuss. Since this does not seem to be the case, it is hard to believe naked shorting is the bogeyman.”42 Another commentator points out that “an obvious check on naked short selling is the unwillingness of Wall Street firms to blow themselves up by advancing large sums against undeliverable shares.”43 A vice-president of the New York Stock Exchange (“NYSE”) once claimed that talk of unregulated naked shortselling is “fear mongering,”44 while a vice-president of the National Association of Securities Dealers (“NASD”; now the Financial Industry Regulatory Authority or “FINRA”) contended he had “seen not one instance of naked short selling or any abusive short activity.”45 For their part, hedge funds—often accused of participating in or facilitating naked shorting schemes—contend that naked short-selling is a “straw man” because most FTDs result from options trading and not a manipulative effort to drive down stock prices.46 And skeptics, responding to complaints from the alleged victims of death spiral financiers, claim that in such deals, the corporate officers are fully aware of the ramifications for themselves and their companies and thus no fraud is being committed.47 With liability and credibility on the line, none of these commentators is an objective or independently reliable source.
If naked shorting does occur, its effects on the aggregate market are arguable, with some contending that “if naked short-selling had not taken place during the micro-cap crime wave of the 1990s, such stocks would have climbed even higher before they crashed”48 and that naked shorting is “the only market force against over-hyped, or even fraudulent, small-cap and micro-cap stocks.”49 Even Warren Buffett suggests that he does not “have a great problem” with naked short-selling because “companies with a large short interest very often have been revealed as frauds or semi-frauds.”50 The stocks most affected by naked short-selling are “penny” stocks—those sold over-the-counter or listed on the NASDAQ bulletin-board.51 Although this article does not debate the economic ramifications of naked short-selling,52 in its focus on the attempt to plead and prove naked short-selling as a justiciable claim in a court of law, the article presumes for the sake of argument that naked short-selling does occur to some extent; that when used as a market manipulation tool, it is illegal;53 and that parties injured by naked short-selling schemes deserve a remedy.
II. NAKED SHORT-SELLING, SCAPEGOAT
In the past seven years, naked short-selling has graduated from an anecdote to a scapegoat. Generally, small- and microcap companies54 are the quickest to blame naked shorting for their financial woes, but now even some of America’s largest corporations contend that naked shorters—rather than their own management or balance sheets—caused their stock prices to decline, consequently preventing the companies from raising capital.55 For example, Enron’s former officers assigned partial responsibility for Enron’s stock price plummet to manipulative short-sellers.56 Furthermore, in July, 2008, the SEC imposed a temporary, emergency rule barring naked shorting of Fannie Mae, Freddie Mac, and seventeen other financial institution securities in response to concerns that naked shorting might exacerbate the subprime mortgage crisis.57
Overstock.com, Inc., an internet retailer, has become the poster child for the media and legal wars against naked shortselling. Patrick Byrne, Overstock’s CEO, claims that a naked short-selling “conspiracy orchestrated by a Sith Lord”58 drove Overstock’s share price down 77% in less than two years.59 However, observers note that this decline was more likely a result of the company’s poor cash flow, annual net losses, lack of inventory, and a problematic transition to an expensive new information technology system—issues that scared away investors— rather than a naked short-selling conspiracy.60 But Byrne remains convinced, having observed four to five times his company’s float traded in a single day,61 and points to Overstock’s daily inclusion on the SEC’s threshold security list (discussed infra) as evidence of the persistent FTDs plaguing the company’s stock.62
In the wake of the Enron, Tyco, and WorldCom scandals, the media has jumped on Overstock’s bandwagon, in part, perhaps, because “There’s something about those two words [naked shorts] that begs for sensational coverage.”63 News outlets ranging from Bloomberg Television to Al Jazeera have profiled the naked shorting controversy.64 The Case of Robert Simpson’s Sock Drawer only fueled the media fire.65 According to an SEC filing, Robert Simpson, a Michigan resident, acquired 1,158,209 shares in Global Links Corporation, which constituted 100% of the company’s issued and outstanding common stock.66 Simpson claims he placed all of the shares in his sock drawer and then watched as over sixty million Global Links shares traded over the next two days, the equivalent of every share in his sock drawer changing hands approximately sixty times, a physical impossibility suggesting that the shares being traded were phantoms created by naked short sellers.67 Although the DTCC investigated Simpson’s claims and determined that at least some of the delivery failures likely resulted from information about a reverse stock split not yet having reached the marketplace and not from naked short-selling,68 Simpson’s story is frequently told by naked short-selling opponents.69
Other small-cap companies also contend that they are the targets of naked short-sellers. For example, Pegasus Wireless claims that naked short-sellers have created thirty million phantom shares and launched a negative email and media campaign against the company, causing the stock to fall from $18.90 to about $0.61 and the company to de-list from the NASDAQ.70 Similarly, Tidelands Oil & Gas executives claim that naked shorters orchestrated the company’s share price decline from $4.00 to $0.12 in 2003, even as the company completed a major pipeline project that should have boosted the stock.71 Meanwhile, Hyperdynamics, an oil seismology firm, sued a hedge fund and other investment funds, alleging that a naked short-selling conspiracy is responsible for a loss of $67 million in market value in less than one year after the company’s stock price fell from $6.00 per share to less than $0.50.72
Naked short-sellers may well be targeting these struggling companies, but declining stock prices must be considered in context. As Bethany McLean has noted, “there are two old maxims on the Street: One, you can’t destroy a fundamentally healthy company through market manipulation—push the stock low enough, and someone will step in and buy it. And two, if a company begins to complain about short-sellers, watch out, because something else is very wrong.”73 As discussed below, the federal judiciary shares Wall Street’s skepticism about the existence and effects of naked shorting.
III. NAKED SHORT-SELLING, CAUSE OF ACTION
Although seasoned market watchers may downplay the issue, the plaintiffs’ bar claims that naked short-selling “is killing young Corporate America, costing jobs, and cheating people out of hundreds of millions of dollars with fake shares.”74 With “hundreds of millions of dollars” in potential damages, lawsuits alleging naked short-selling have proliferated in the past five years;75 plaintiffs are seeking remedies in both the federal and state courts. This section focuses on federal court litigation.
A. Legal Framework
American jurisprudence first recognized the naked shorting phenomenon in The Anderson Co. v. John P. Chase, Inc.,76 a 1975 securities fraud case in which the district court determined that an investment advisor had no duty to prevent its client from short selling. Today, plaintiffs alleging injuries caused by naked short-selling rely on both section 10(b) of the 1934 Securities Exchange Act77 and SEC rule 10b-578 in arguing that naked short-selling is fraudulent and thus illegal. In conjunction, these broad provisions establish a framework for two types of securities fraud claims: misrepresentation and market manipulation. A plaintiff bringing a misrepresentation claim under section 10(b) and rule 10b-5 must demonstrate that the defendant made a false statement or omitted a material fact, in connection with the purchase or sale of a security by the plaintiff, with scienter, and that plaintiff’s reliance on defendant’s action caused plaintiff injury.79 While not easy to pursue, naked-shorting-as-misrepresentation claims are common and consistently adjudicated by the courts.80
Many naked short-selling lawsuits also allege market manipulation. Market manipulation is a term of art that “connotes intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities.”81 However, the legal standard for market manipulation is less lucid than that for misrepresentation and differs substantially among the circuits. The uncertainty of what constitutes market manipulation and how a market manipulation claim should be pled and litigated thus animates the remainder of this section’s discussion.
The Second Circuit, which hears most market manipulation claims because of its jurisdiction over New York, requires plaintiffs to prove that they suffered damages, in reliance on the defendants’ material misrepresentations, omissions, or scheme to defraud; that the defendants acted with scienter; that this occurred in connection with plaintiffs’ purchase or sale of a security; and that this was furthered by the defendants’ use of the mails or a national securities exchange.82 The Ninth Circuit requires a plaintiff to allege the use or employment of a manipulative or deceptive device or contrivance; scienter; a connection with the purchase or sale of a security; reliance or transaction causation; economic loss; and loss causation, i.e., a causal connection between the manipulative or deceptive device or contrivance and the loss.83
The Third Circuit offers a more specific standard in requiring plaintiffs to prove that the defendant engaged in deceptive or manipulative conduct by injecting inaccurate information into the marketplace or by creating a false impression of supply and demand for a security; in connection with the plaintiff’s purchase or sale of the security; that the defendant had the purpose (scienter) of artificially depressing or inflating the price of the security; and that the plaintiff suffered damages in reliance on the defendant’s conduct.84 Under this standard, the Third Circuit holds that short selling could only form a basis for a section 10(b) market manipulation claim if done “in conjunction with some other deceptive practice that either injected inaccurate information into the market or otherwise artificially affected the price of the stock.”85 So can the “naked” part of short selling constitute “some other deceptive practice”?
In the seminal case on point, Sullivan & Long, Inc. v. Scattered Corporation,86 the Seventh Circuit said no, unequivocally holding that naked short selling is not intrinsically manipulative under section 10(b). While one scholar suggests that Sullivan & Long can be distinguished from other naked short-selling cases where the naked short seller violates a market rule or equitable trading principle,87 this argument does not help plaintiffs’ suits about over-the-counter/bulletin-board stocks for which, traditionally, there have been no locate or delivery rules. Instead, scholars and litigators attempt to distinguish the type of naked shorting in Sullivan & Long from the type of naked shorting allegedly targeting small-cap companies now.
Unlike in Sullivan & Long, most targets of death spiral financing and corresponding naked shorting are “universally small, financial weak companies that trade in inefficient, illiquid markets lacking adequate regulatory protections.”88 While the courts might tolerate naked short selling for securities of large, established issuers trading on exchanges, it is harder to justify the naked short selling of small issuers trading in the less-regulated securities markets.89
Assuming plaintiffs can distinguish Sullivan & Long and convince a court that naked shorting constitutes market manipulation, ultimately, plaintiffs alleging section 10(b) claims must meet constitutional standing requirements, the particularity requirements of Federal Rule of Civil Procedure 9(b),90 and the heightened pleading standards of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), all discussed infra. Together, these rules impose a heavy burden on plaintiffs, one that is rarely met. And even if plaintiffs surpass these hurdles, there still remains the fundamental question of whom they can viably sue.
B. Problems with Naked Short-Selling As Market Manipulation Cases
If naked short selling exists, and is more than an anecdote-supported myth chased by counsel for small cap companies, can it be effectively pleaded and proved as market manipulation by private plaintiffs in court? The answer, thus far, is no, at least in federal court. Although naked short-selling violates black-letter trading rules on the exchanges,91 to date, no naked short-selling claim has succeeded to final judgment on market manipulation grounds, and only a few suits have progressed beyond a defendant’s motion to dismiss. Collectively, standing requirements, the Federal Rules of Civil Procedure, and the Private Securities Litigation Reform Act pose high hurdles for plaintiffs. In addition, the lack of viable, attractive defendants, as well as brokerage industry and DTCC resistance to any allegation of manipulative naked shorting, make such lawsuits difficult to pursue.
1. Standing Requirements
Standing is the first obstacle for prospective plaintiffs in naked short-selling lawsuits. To meet the constitutional standard, 92 plaintiffs must show that they have suffered a legal injury, that the injury can be traced to the challenged action, and that the injury is likely to be redressed by a favorable decision of the court.93 In the context of securities litigation, courts limit standing to “persons who are defrauded in connection with the purchase or sale of securities. This limitation is satisfied by showing ‘a nexus between the defendant’s actions and plaintiff’s purchase or sale.’”94 The problem with a naked short-selling claim is that is difficult to determine who is actually defrauded or injured by the alleged action, and thus, who has standing to sue.95
Issuers are the most frequent private litigants in naked short-selling lawsuits, but unless the issuer was also a purchaser or seller of its stock, the issuer lacks standing to sue.96 Merely issuing treasury stock does not necessarily constitute a “sale” of securities, nor does honoring conversion notices, for purposes of conferring standing to assert a market manipulation claim.97 Even if issuers can meet the standing requirements, as in situations where the issuers sell future-priced convertible securities to death spiral financiers, the risk of suing short sellers may outweigh the benefits to shareholders. A study of 266 public companies that sued or publicly accused short sellers of wrongdoing from 1977 to 2002 found that the companies’ stock returns suffered, falling an average of 2% per month in the year following the action.98 This is possibly because once a company publicly admits that it is vulnerable to naked shortselling schemes, investors may lose confidence in the company’s long-term viability; or perhaps instead, investors shy away from litigious companies. In any case, from the issuer’s perspective, the negative financial ramifications of a lawsuit may undermine any successful judgments.
Investors may have a legitimate cause of action, but they face difficulties in proving damages. As per the Supreme Court’s standard in Dura Pharmaceuticals, Inc. v. Broudo, an investor would need to prove “loss causation,” i.e., that the defendants’ naked short-selling activities proximately caused the investor’s economic loss.99 In situations where the companies targeted by naked short-sellers face additional financial difficulties, it is difficult, without inadmissible speculation, to quantify the effects of naked shorting as distinguished from other contributors to a lower stock price.100
Although it dealt with misrepresentation, and not manipulation claims, Miller v. Asensio & Co, Inc.101 illustrates this dilemma. In Miller, stockholders in Chromatics Color Sciences International, Inc. (“CCSI”) sued Asensio, an investment advising company, alleging that Asensio employees made material misstatements about CCSI, causing CCSI stock to drop and the stockholders to lose money.102 A jury found that the defendant’s employees had made material misstatements, and the defendant was liable under rule10b-5, but that the plaintiff was entitled to zero damages.103 The Fourth Circuit affirmed the verdict, determining that the jury could have reasonably concluded that the plaintiffs proved that defendant’s fraudulent misrepresentations constituted a substantial cause of plaintiffs’ loss and so find the defendant liable; the court also concluded that the plaintiffs failed to show that their loss was solely caused by defendant’s fraud, and therefore, the jury could refuse to award any damages.104
The Fourth Circuit thus recognized that while many factors, including natural corrections of overinflated value, reports of financial mismanagement, scandal, and a bad business model, unrelated to rule 10b-5 and section 10(b) violations, can cause a decline in a company’s stock, such factors do not absolve a perpetrator of fraud from liability,105 and do not, by implication, undermine the standing of the plaintiff. However, a plaintiff who seeks damages—and not merely a judgment of liability—has a difficult battle in calculating and proving recoverable damages.106 CompuDyne Corporation v. Shane may bolster a prospective plaintiff’s damages and standing arguments, however. In CompuDyne, a PIPE (“private investment in public equity”) related action, the court held that:
But for Defendants’ insider trading and illegal short selling, Plaintiffs. . .would have received a price higher than $12 per share for the shares sold in the PIPE. Plaintiffs allege that the first part of Defendants’ scheme to illegally sell short CompuDyne stock artificially depressed and/or increased the volatility of CompuDyne’s stock price. . . .Plaintiffs also allege that the price of shares issued in connection with a PIPE was ‘discounted from the prevailing market price.’ Thus, the lower the market price of CompuDyne stock prior to the pricing of the PIPE, the lower the shares to be issued in connection with PIPE would be priced, and the less money Plaintiffs would receive from the PIPE. Plaintiffs’ allegations fulfill the [Dura Pharmaceuticals] standard for pleading loss causation.”107
The CompuDyne court further explained the Supreme Court held that pleading loss causation based on an allegation that the plaintiff sold his stock for less than it was worth because its price was artificially depressed is not the same as pleading loss causation based on an allegation that the plaintiff purchased a stock whose price was merely artificially inflated. 108 A plaintiff who sells a stock at an artificially depressed price no longer possesses the shares and thus has realized an economic loss.109 CompuDyne thus represents the most sympathetic judicial view yet of naked short-selling plaintiffs. However, unless the investor requested that the brokerage firm close out the sale and produce paper stock certificates, and unless the brokerage firm was unable to do so, the investor is arguably a participant—however unwitting—in the naked shorting scheme; if he never demanded a close-out or presentation of physical stock certificates, the investor cannot complain that he was sold phantom shares. Because even phantom shares show up as legitimate long positions in the investor’s account, the investor faces an uphill battle in proving he was injured by naked short-selling. Without provable, redressable injury, an investor lacks standing to sue.
In addition to the standing-based barriers, litigation is financially impracticable for the average individual investor. Class actions are no more appealing in the wake of the Securities Litigation Uniform Standards Act of 1998 (SLUSA)110 and the Supreme Court’s decisions in Dura Pharmaceuticals111 and Tellabs v. Makor Issues & Rights, Ltd.,112 discussed infra. The result: With the investors themselves unwilling or unable to sue, and standing requirements precluding the targeted corporations from litigating, would-be lawsuits against naked short-sellers lack viable plaintiffs.
2. Federal Rules of Civil Procedure
Assuming that the plaintiff meets the standing requirement, the Federal Rules of Civil Procedure pose the next hurdle. Federal Rule of Civil Procedure 12(b)(6) allows for dismissal of a lawsuit if a plaintiff fails “to state a claim upon which relief can be granted.” Such dismissals are to be viewed with disfavor and are granted only where “it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.”113 If the plaintiff is entitled to relief under any set of facts or any possible legal theory that could consistently be proven with the allegations in the complaint, the court may not grant dismissal.114 In determining whether dismissal should be granted, the Court accepts as true all allegations contained in the plaintiff’s complaint and views the facts in the light most favorable to the plaintiff.115 However, conclusory allegations or legal conclusions will not suffice to prevent a motion to dismiss,116 and it is this standard over which most plaintiffs in naked short-selling suits have stumbled.
Courts treat a dismissal for failure to plead fraud with particularity as required by Federal Rule of Civil Procedure 9(b) as a dismissal for failure to state a claim upon which relief may be granted.117 Under rule 9(b), “in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge and other conditions of mind of a person may be averred generally.”118 The purpose of rule 9(b)’s particularity requirement is to ensure that defendants can effectively respond to plaintiffs’ allegations, to prevent the filing of baseless complaints for purposes of obtaining discovery on unknown wrongs, and to protect defendants from unfounded allegations of wrongdoing which might injure their reputations.119 Although rule 9(b) is “relaxed” with respect to market manipulation claims,120 thus far many courts have interpreted rule 9(b) inconsistently and stringently in naked short cases, particularly in conjunction with the heightened pleading requirements of the PSLRA, discussed below.
3. Private Securities Litigation Reform Act (“PSLRA”)
Through the PSLRA, enacted in 1995, Congress imposed stringent requirements for pleading federal securities fraud claims. The complaint must plead fraud or manipulation with particularity and specific facts supporting strong inference of scienter. For example, PSLRA Paragraph (b)(1), which applies to securities claims alleging misstatements or omissions of material facts, requires that “the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.”121
Paragraph (b)(2) applies to securities claims “in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind,” and requires that the complaint “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.”122
The PSLRA prohibits discovery until these pleading requirements are met.123 This means that would-be plaintiffs often lack access to information and documents that might bolster their naked short-selling claims, especially because there is a lack of public hard data on stocks that fail to deliver. 124 Although it reports to regulators, the DTCC does not publicly disclose information on fails, because, as the DTCC argues, releasing that information might jeopardize SEC investigations into such fails, and because “[National Securities Clearing Corporation] rules prohibit release of trading data, or any reports based on the trading data, to anyone other than participating firms, regulators, or self-regulatory bodies such as the NYSE or NASDAQ. We do that for the obvious reason that the trading data we receive could be used to manipulate the market, as well as reveal trading patterns of individual firms.”125 Would-be plaintiffs are thus left with no “official” calculations of delivery fails. The SEC, with the DTCC’s support, is currently considering releasing two-month-old, aggregated delivery failure data on a quarterly basis,126 but even that data may be too opaque and only suggest naked short-selling, not prove it.127
Thus, to meet the PSLRA pleading requirements, the plaintiff would have to show that the most plausible explanation for why the disputed trading practices occurred is market manipulation. Given the lack of accessible data, this sometimes may require the equivalent of a res ipsa loquitur argument— let the available facts point toward the obvious, common-sense explanation. In addition, confidential sources, such as former brokerage firm employees, who could testify to the occurrence of naked short-selling and the knowledge of the participants might help plaintiffs plead their claims.128 The high attrition rate at brokerage firms suggests availability of such witnesses. 129 Notably, however, under the Seventh Circuit’s ruling in Higginbotham v. Baxter International, Inc.,130 anonymous witnesses are suspect and should be “discounted.”131 The Higginbotham plaintiffs’ complaint relied heavily on statements from anonymous confidential witnesses, including unnamed former employees of the defendant, in pleading scienter in support of their securities fraud claims.132 The Seventh Circuit determined that “confidential witness” allegations are insufficient because such witnesses’ motives cannot be discerned or their information objectively corroborated.133 Higginbotham thus poses another obstacle for plaintiffs seeking remedies for already difficult-to-prove naked shorting claims.
Alternatively, because market manipulation claims require the showing of a pattern of behavior, plaintiffs could gather evidence charting a pattern of black-letter rule-breaking by short-sellers and thus create a strong inference of intent. 134 Because FINRA rules expressly prohibit naked shortselling, illustrating repeated violations of these rules should be sufficient for pleading purposes. But again, the problem for plaintiffs is in gathering compelling evidence of these rule violations, given that the brokerages, the DTCC, and the SEC are not forthcoming with specific information about delivery failures. In addition, as discussed infra, the FINRA rules do not apply to all market players; if the alleged naked shorter is not bound by FINRA rules, then violations of those rules do not support evidence of intent.
Ultimately, to meet the PSLRA’s heightened pleading requirements, plaintiffs need to prove scienter. The exact degree of scienter—recklessness?135 actual knowledge? Conscious misbehavior? —required is unclear,136 although increasingly, some courts suggest leniency. As noted in CompuDyne: Allegations of scienter are not subject to the same exacting scrutiny applied to the other components of fraud, such as direct participation. Scienter can be alleged by conclusory allegations if they are supported by facts giving rise to a strong inference of fraudulent intent. The inference may be established either “(a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.”137
In CompuDyne, for example, the court determined that allegations the defendant engaged in unlawful short sales based on confidential non-public information was highly probative of scienter.138 However, generalized assertions of financial motive, without more, are insufficient to meet the PSLRA’s pleading standards.139
The Supreme Court recently tightened the meaning of the PSLRA’s “strong inference” requirement in Tellabs, Inc. v Makor Issues & Rights, Ltd.140 The Court held that in determining whether a securities fraud complaint gives rise to a “strong inference” of scienter, a court “must engage in a comparative evaluation” and consider “competing inferences.”141 As the Court noted, “[a]n inference of fraudulent intent may be plausible, yet less cogent than other, non-culpable explanations for the defendant’s conduct.”142 Thus, to qualify as “strong” under the PSLRA’s pleading requirement, the “inference of scienter must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.”143 The Court further defined “strong” as meaning “powerful,” “persuasive,” and “effective,” underscoring its conclusion that plaintiffs must present a compelling inference, not just a possibility, of scienter.144 Although Tellabs does not break dramatic new legal ground, it does emphasize how difficult the scienter burden is, as further illustrated in the following cases, which all consider whether and how plaintiffs meet the pleading requirements for claims of market manipulation through naked short-selling.
In Jag Media Holdings, Inc. v. A.G. Edwards & Sons, Inc.,145 investors sued over 100 brokerage firms, investment banks, and financial institutions, alleging a naked short-selling conspiracy. 146 Jag Media Holdings (“Jag”), a small dotcom that provides financial and market-related information to Internet subscribers, had accepted “convertible debenture” financing from three named defendants.147 After the deal was signed, the stock price tanked to five cents a share.148 Jag claimed that the financier, with the help of brokerage firms, had manipulated the market via naked short sales to drive down the stock price.149 In support of its naked short-selling allegations, Jag presented evidence that the brokerage firms had unsettled trades and pointed to purported discrepancies between trading volume and “official” DTCC records of stock ownership.150 To support a strong inference of scienter, Jag primarily relied on copies of e-mail exchanges between the brokerage firms and the issuer discussing the occurrence of some FTDs.151 The court dismissed the lawsuit for failure to state a claim, holding that evidence of FTDs does not alone support an inference of fraud.152 The court determined that the e-mail evidence showed only that the brokerage firms were attempting to settle the purported naked short sales, not that they were committing fraud.153
As Jag illustrates, merely identifying a failure to deliver is insufficient to prove fraud via naked short-selling since delivery failures can occur for innocent reasons,154 including human or mechanical errors or processing delays.155 The SEC has identified at least five circumstances in which a delivery failure may occur: (1) delays in customer delivery of shares to the broker dealer; (2) an inability to borrow shares in time for settlement; (3) delays in obtaining transfer of title; (4) an inability to obtain transfer of title; and (5) deliberate failure to produce stock at settlement which may result in a broker dealer not receiving shares it had purchased to fulfill its deliver obligations.156 Delivery failures can occur on both long and short sales, and they occur often—approximately 1.5% of all trades by dollar value fail to settle on a typical day.157 Thus, neither the courts nor the SEC are willing to declare all delivery failures illegal or evidence of market manipulation out of fear of hampering liquidity in stocks where there is no fraudulent activity.158
Jag implicitly followed the lead of the Third Circuit’s opinion in GFL Advantage Fund, Ltd. v. Colkitt,159 a case in which the court determined that short selling by itself can never be market manipulation and that something more is required. Merely alleging short-selling, or even demonstrating delivery failures—which plaintiffs claim are the hallmark of naked shortselling—is insufficient to plead market manipulation.
Questions remain in Jag’s wake: What evidentiary allegations would have satisfied the pleading requirements for fraud? How, as a practical matter, can a plaintiff plead scienter? Is naked short selling really fraud at all? Or are unsettled trades arguably negligence on the part of brokerage firms instead? And if negligence is the better route to liability, what proof is necessary to establish a duty of care from brokerage firms to issuers?
Subsequent court decisions on naked short-selling illuminate some answers. In ATSI Communications, Inv. v. The Shaar Fund, Ltd.,160 another convertible financing case, the Second Circuit provided another example of claims and evidence that do not meet the pleading requirements. In ATSI, the plaintiffs alleged both misrepresentation and market manipulation by the defendants.161 With respect to the market manipulation claim, plaintiffs alleged that defendants’ ownerships of their convertible preferred securities gave them an incentive to drive down the market price of ATSI common stock in order to obtain more shares at the time of conversion, a typical death spiral/short selling scheme.162 The plaintiffs alleged, on information and belief, that defendants “employed a variety of manipulative devices and techniques, including, without limitation, painting the tape, hitting the bids, failing to obtain the best price, naked short-selling, and dumping stock in large numbers on the market.”163 To help support their claims, the plaintiffs provided charts containing trading data for the period in question, which asserted that the data indicated manipulative trading.164 The Court affirmed dismissal of the plaintiffs’ pleadings, holding that they failed to meet the requirements of Federal Rule of Civil Procedure 9(b), that allegations that are “conclusory” or “unsupported by assertions of fact” are insufficient, and that allegations of fraud generally cannot be based on “information and belief” absent specific allegations of fact to warrant the alleged belief.165 Specifically, the court concluded that the plaintiffs’ list of “devices and techniques” failed to explain why they were manipulative; where, when, and how they occurred; which defendants committed them; and the effect of the devices on the stock’s trading volume and price.166 Further, the data charts provided by the plaintiffs did not explain how the data was linked to the defendants or how it supported market manipulation.167 The court emphasized that it is not enough to claim that naked short-selling or convertible financing occurred; the law requires that these allegations be supported by facts, and not conclusions.168 Accordingly, because the PSLRA and federal rules pleading standards were not satisfied, the Second Circuit upheld the district court’s dismissal of the plaintiffs’ naked short-selling claims.169
In contrast to the Second Circuit’s stringent standard, a federal district court in Arkansas adopted a more sympathetic view of the plaintiffs’ attempt to compile evidence in support of its market manipulation allegations in Pet Quarters, Inc. v. Badian.170 The court determined that a detailed chart of stock conversions and stock price differences in support of a death spiral theory was sufficient to satisfy the PSLRA and rule 9(b) pleading requirements.171 Likewise, in another death spiral case, Sedona Corp. v. Ladenburg Thalmann & Co, Inc. et al.,172 a New York district court adopted a more lenient pleadings standard for securities fraud claims. The court concluded that with respect to motive and opportunity, claims of motive are insufficient to support scienter without allegations that the defendant would have substantially profited from the financing agreement in question.173 However, the court also noted that “[f]actual determinations of motive and opportunity are not the only means by which a securities fraud plaintiff may plead scienter. Allegations of ‘facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness’ are also sufficient.”174 The court concluded that Sedona met the scienter pleading standard by alleging that [the defendant,] Ladenburg[,] played a central role in the alleged scheme to defraud Sedona by (1) obtaining investors for Sedona that Ladenburg knew would likely manipulate Sedona’s stock; (2) creating a “bait and switch” scenario through which Sedona would ultimately be forced to procure its financing solely through Ladenburg’s investors; (3) concealing from Sedona that it had significant prior working relationships with entities such as Amro and Markham, and that together they had participated in similar schemes in the past; and (4) misrepresented its investment capabilities as a trick to mislead the market.
Together, these factors supported a strong inference that Ladenburg either intended to defraud Sedona, had knowledge of the alleged fraud, or recklessly disregarded the truth in connection with that fraud.175 Consequently, Sedona survived some of its defendants’ motions to dismiss, with its market manipulation claims still largely in tact, a feat Jag was unable to accomplish.
Similarly, in Internet Law Library, Inc. v. Southridge Capital Management, LLC,176 another court in the Southern District court determined that claims alleging naked short selling as market manipulation are entitled to a more relaxed pleading standard because “the facts relating to a manipulation scheme are often known only by the defendants.”177 Plaintiffs must still specify, at a minimum, “what manipulative acts were performed, which defendants performed them, when the manipulative acts were performed, and what effect the scheme had on the market for the securities at issue.”178 In Jones v. Intelli-Check, Inc., another district court, interpreting Internet Law Library, noted that to take advantage of such a relaxed pleading standard, plaintiffs must both plead that the necessary factual support for their manipulation claim is within the defendants’ exclusive control and detail the extent of their futile efforts to obtain that information.179 In Internet Law Library, the court’s leniency was ultimately for naught as the plaintiffs’ market manipulation claims were dismissed because of discovery process abuses.180
Sedona, Internet Law Library, and Pet Quarters suggest that plaintiffs can survive the pleadings stage on naked short-selling claims; the strong dicta and holdings in Sullivan and Long, Jag Media, GFL, and ATSI suggest that they cannot. There is thus a need for further appellate review and clarification of the market manipulation pleadings standards in light of the recent Tellabs opinion. What specific factual allegations must a plaintiff plead to survive a motion to dismiss? And is evidence to support those factual allegations likely available to plaintiffs prediscovery? If such evidence is not realistically available to prospective plaintiffs, the PSLRA achieves only the first of its twin goals to “curb frivolous, lawyer-driven litigation, while preserving investors’ ability to recover on meritorious claims.”181
4. The Lack of Viable Defendants
Even if a plaintiff could meet the rigorous requirements of standing, the Federal Rules, and the PSLRA, no lawsuit is viable without a defendant. So who can be sued? The most obvious choice is the naked short seller, who is both morally and legally the most culpable. Identifying naked shorters, and more importantly, collecting judgments from them, are problematic issues, however, making them unappealing targets for the plaintiffs’ bar.
Similarly, the death spiral financiers, whom plaintiffs frequently allege are the puppeteers of naked short-selling, are also difficult to find and collect from, as many are located outside of the United States, or are protected by offshore shell companies.182 The good news for plaintiffs is that in addition to securities fraud claims, the death spiral financiers may also be easy targets for common law breach of contract, common law fraud, or breach of fiduciary duty causes of action.183 With their deep pockets, brokerage firms are superficially attractive defendants, but as discussed supra, the PSLRA’s scienter requirement poses a steep hurdle to their liability in federal court. Moreover, brokerage firms owe no fiduciary duty to issuers nor, under SEC rule 202(a)(11)-1, to typical investors with non-discretionary accounts; additionally, they have no apparent incentive to commit fraud or encourage naked shortselling.
Thus, the best case against brokerage firms would be negligence-based, not securities fraud. Even a negligence claim might not pass muster, since arguably, it could be preempted by the PSLRA, or in certain class actions involving certain covered securities, barred by the SLUSA.184 If not preempted, issuer-plaintiffs would need to articulate the precise duty of care owed to them by brokerages, how that duty of care was breached, and whether the injuries caused were foreseeable. Once more, this is an arduous standard, as brokerage firms can argue that, under SEC rules, they have a right to rely on the DTCC. DTCC rules are promulgated under the SEC’s auspices and thus essentially blessed by a federal agency. The strong federal interest in, and supervision of, the DTCC’s electronic clearance and multilateral netting system leaves brokerage firms little room for deviance or autonomy. At best, a plaintiff might claim that brokerage firms should not credit the accounts of purchasers of securities until the securities actually deliver and settle, which would reduce the incidence of multiple beneficial ownership and thus curb phantom shares. However, because federal regulators are unlikely to impose such a rule—other than on a temporary, emergency basis— out of legitimate concern for market liquidity, it remains unlikely that any court would do so, either.
Unable to win against the brokerage firms, plaintiffs have targeted the DTCC, alleging two claims: first, that the DTCC should force close-outs of FTDs to curb naked shorting; second, that the DTCC essentially counterfeits stock shares through its stock borrow program, which allows the National Securities Clearing Corporation (“NSCC”), a DTCC subsidiary to borrow shares from its members and use the shares to fulfill delivery obligations after the selling brokers failed to deliver their shares. With respect to the first criticism, the SEC clearly states that the DTCC, through the NSCC, “does not have the authority to execute buy-ins on behalf of its members. Moreover, forcing close-outs of all fails can increase risk in clearing and settlement as well as potentially interfering with the trading and pricing of securities.”185 Regarding the allegations against its stock borrow program, the DTCC defends itself with this explanation:
Under the Stock Borrow program, NSCC only borrows shares from a lending member if the member actually has the shares on deposit in its account at the DTC and voluntarily offers them to the NSCC. If the member doesn’t have the shares, it can’t lend them. Once a loan is made, the lent shares are deducted from the lender’s DTC account and credited to the DTC account of the member to whom the shares are delivered. Only one NSCC member can have the shares credited to its DTC account at any one time. . . .The Stock Borrow Program was created in 1981 with the approval of the SEC to help reduce potential problems caused by fails, by enabling NSCC to make deliveries of shares to brokers who bought them when there is a “fail to deliver” by the delivering broker. Even if a “fail to receive” is handled by Stock Borrow, the “fail to deliver” continues to exist, and is counted as part of the total “fails to deliver.” If the total fails to deliver for that issue exceeds 10,000 shares, it gets reported to the markets and the SEC.186
In short, the DTCC posits that the DTCC always holds someone accountable for a FTD, and thus, it does not enable naked short-selling or fraudulent market manipulation. The DTCC further shields itself from liability by arguing that its functions are regulated and overseen by the SEC; as a result, any naked short-selling claims based in common law negligence are preempted by federal law. As the following cases illustrate, no plaintiff yet has won a final judgment against DTCC based on naked short selling claims; most suits against the DTCC do not progress beyond the initial pleadings. As of the end of 2007, the DTCC or its subsidiaries had been sued fourteen times on allegations of naked short-selling. In at least four of these suits, including Williamson v. Goldman, Sachs & Co., et al.,187 Genemax Corp. v. Knight Securities, LP, et al.,188 Miller, as Trustee v. Boston Partners Management LP, et al.,189 and Intergold Corp. v. Depository Trust Corp.,190 plaintiffs never served the DTCC defendants and the suits against the DTCC thus did not proceed.
In Nutek v. Ameritrade, Inc.,191 the plaintiffs voluntarily dismissed the DTCC with prejudice, and the remaining DTCC defendants were dismissed two months later. Similarly, in Capece v. Elgindy,192 the plaintiffs voluntarily dismissed the DTCC defendants three months after filing suit. The DTCC also won dismissal of the naked short-selling allegations against it in X-Clearing Corp. v. Depository Trust Corp., (the Intergold action)193 X-Clearing Corp. v. Depository Trust Corp., (the Petrogen action)194 and Walters v. Depository Trust and Clearing Corp.195
Nanopierce Technologies, Inc., et al. v. The Depository Trust and Clearing Corp., et al.,196 a lawsuit brought in Nevada state court, illustrates the weaknesses in naked short-selling lawsuits against the DTCC. Nanopierce, a biotechnology holding company, sued the DTCC in April 2004,197 arguing under state law that the DTCC was responsible for the drop in the company’s stock price because the DTCC’s Stock Borrow Program had enabled brokerages to engage in naked shorting of Nanopierce shares.198 The DTCC responded that its clearing and settlement activities are subject to the oversight and approval of the SEC and thus, under the Constitution’s federal preemption doctrine, cannot be challenged under state law.199 The SEC filed an amicus brief in support of the DTCC.200 Ultimately, the court adopted the DTCC’s argument, noting, “[S]tate law may not be applied as to impose damages on [the DTCC]. To do this would be to forbid Defendants from doing what the SEC authorized them to do.”201 The Supreme Court of Nevada upheld the dismissal.202
Following Nanopierce, the DTCC achieved victory in Sporn v. Elgindy.203 The suit, filed by Trident Systems International Inc. and its president, Alan Sporn, alleged that Anthony Elgindy engaged in naked short selling of Trident shares.204 The plaintiffs contended that the DTCC and various brokerages facilitated Elgindy’s naked short-selling by allowing improper trades in Trident’s stock.205 The plaintiffs sued the DTCC on both securities fraud and breach of contract grounds.206 In addition to dismissing the claims against the DTCC, the court sanctioned the plaintiffs.207
In Capece v. The Depository Trust and Clearing Corp., et al.,208 the DTCC once again successfully defended itself against naked short-selling allegations. The Capece plaintiffs were stockholders in Cybercare, Inc., a Florida corporation publicly traded on the NASDAQ.209 After Cybercare’s stock plummeted from the plaintiffs’ purchase price of $15.06 to an average sale price of $0.25,210 the plaintiffs sued the DTCC for common law negligence, alleging that the DTCC failed to monitor its stock borrow program thereby enabling naked shorting.211 The negligence claim was thus preempted, and the case against the DTCC dismissed. In its dismissal order, the court relied on the Nanopierce decision, concluding that [a]llowing Plaintiffs to assert a state law cause of action against Defendants [DTCC and its subsidiaries] would require Defendants to tailor their practices with regard to the SBP [stock borrow program] to satisfy each state’s formulation of the standard of care in a negligence action. Such a result would destroy the Congressionally-mandated uniform system governing securities trading.212
In Whistler Investments, Inc. v. DTCC, et al.,213 the Ninth Circuit similarly held that DTCC’s clearing and settlement rules, which had been approved by the SEC, cannot be challenged under state law.214 Adopting part of the Capece court’s reasoning, the Whistler court determined that because the DTCC’s Stock Borrow Program is explicitly approved by and subject to the ongoing oversight of the SEC, the Supremacy Clause of the United States Constitution bars Whistler’s legal challenge on “conflicts,” but not “field,” preemption grounds.215
Finally, the DTCC recently scored another dismissal from an Arkansas federal court in Pet Quarters, Inc. v. The Depository Trust and Clearing Corp., et al.216 Pet Quarters, Inc. (“PQI”), an internet-based pet supply, alleged similar claims to those in Nanopierce, Whistler, and Capece.217 Specifically, PQI claimed that through its Stock Borrow Program, the DTCC, conspired with death spiral financiers to artificially increase the supply of PQI stock and permitted significant open FTD positions on “millions of shares” of PQI stock to exert additional downward pressure on the stock price.218 PQI contended that it relied on the DTCC’s misrepresentation that the Stock Borrow Program is used to clear and settle trades efficiently and sought $400 million in damages.219 The court dismissed PQI’s claims with prejudice on preemption grounds.220
The results to date in these state-law based suits against the DTCC are sensible, given the DTCC’s consecrated purpose: to provide an efficient, uniform mechanism for clearing and settlement of securities trade.221 Permitting each state to hold the DTCC to its own standards would undermine the efficacy of a centralized system. However, the DTCC’s persistent defense is that it is just fulfilling its SEC-regulated functions. If that is indeed the case, given the apparent systemic flaws, the onus is then on the SEC to reconsider its directive to and oversight of the DTCC and its subsidiaries.
IV.TRENDS IN NAKED SHORT-SELLING LITIGATION
With the limited success of traditional securities fraud claims, the search for naked shorting culpability continues along more creative routes. Now hedge funds are suing brokerages on antitrust grounds. The SEC launched an assault on hedge funds that engage in private investment in public equity (“PIPE”) transactions. For their part, state attorneys general are investigating brokerages for naked short-selling abuses. And the plaintiffs’ bar has turned its attention to state court claims of fraud, negligence, and conversion. This section previews each.
A. Antitrust Suits Against Brokerages
In April 2006, Electronic Trading Group, LLC, a hedge fund, sued eleven major broker-dealers, accusing them of collusion in improperly charging fees by failing to borrow or deliver stock needed to back naked short sales.222 The plaintiffs, who sought class action certification, contended that the banks dominate the market for prime brokerage services to short sellers and tolerate among themselves chronic failures to deliver by which clients are charged for ‘borrowing’ when in fact no borrowing actually takes place. Defendants collusively condone and engage in these practices to their individual and collective enrichment, routinely alternating among themselves in the roles of prime broker who fails to deliver and third-party broker who permits the fail to persist.223
The plaintiffs did not challenge the practice of naked shortselling; they challenged only the lending costs and fees that they were charged and paid, when they did not receive the bargained-for-value (borrowed shares) in return.224 They based their allegations, in part, on violations of section 1 of the Sherman Antitrust Act,225 which requires plaintiffs to prove that a conspiracy (i.e., a “combination”) exists, and that interstate commerce is restrained. To support their antitrust claims, plaintiffs alleged that defendants collectively control 83% of aggregate client assets in the market and thus “set prices and institute industry practices in order to benefit themselves at the expense of their clients.”226 This novel approach to brokerage liability for naked short-selling schemes did not rely on proof of market manipulation or misrepresentation and did not even attempt to show that naked shorting itself is illegal; rather, the complaint was that brokerages are permitting naked shorting but still charging clients as if their positions are covered through borrowed shares. The defendants responded that the Supreme Court’s June 2007 ruling in Credit Suisse Securities (USA) v. Billing227 precludes antitrust claims on activities “within the heartland” of securities regulation.228 The defendants argued that “even conduct that violates the securities laws is immune from the antitrust laws where the alleged antitrust conspiracy depends on finely drawn lines between permissible and impermissible conduct. In such cases, the court ruled that regulation must be left to the expertise of securities regulators.”229
Billing did not expressly address antitrust concerns in short selling cases. Instead, Billing involved allegations that defendant underwriting firms had violated antitrust laws by engaging in certain conduct in connection with a series of initial public offerings that was also prohibited by federal securities laws and regulations.230 In short, the defendants in Billing had allegedly violated federal securities law, but instead of suing for these violations, the plaintiffs sued under antitrust law instead, hoping to recover treble damages.231 The Supreme Court concluded first, that there was a “plain repugnancy” between the plaintiffs’ antitrust claims and the federal securities law, and second, that federal securities laws implicitly preclude the application of antitrust law to the alleged securities brokerage conduct.232 The lesson in Billing seems clear: If federal securities law expressly prohibits certain conduct, that conduct should be litigated under federal securities law, and not under a more creative antitrust claim.
In the Electronic Trading Group case, the district court ultimately held that under Billing, there is clear incompatibility between securities law and antitrust law with respect to short sales, and that the SEC regulations supersede.233 The court worried that if it allowed the plaintiffs’ antitrust suit to proceed, there was substantial risk that a non-expert jury might mistake legal conduct under the securities laws for evidence of a conspiracy under antitrust laws,234 and allowing antitrust suits such as this could chill activities that securities laws permit. 235 Thus, the court dismissed the plaintiffs’ suit.236
B. Lawsuits Against Hedge Funds
The SEC now carefully scrutinizes hedge funds generally, and PIPE transactions specifically, for market manipulation activity. However, most of the resulting lawsuits focus on technical violations of trading rules, not on substantive market manipulation claims,237 probably because until its recent antifraud rule,238 discussed infra, the SEC had refrained from declaring deceptive naked short selling to be market manipulation. For example, in SEC v. Lyon, the SEC filed fraud charges against Lyon, a hedge fund manager, and Gryphon Hedge Funds for engaging in illegal “PIPE” trading schemes.239 The SEC alleged that the defendants implemented an unlawful trading scheme, which realized more than $6.5 million in “illgotten gains” by investing in PIPE offerings without incurring market risk.240 Specifically, the SEC claimed that the defendants then engaged in naked short-selling of the issuer’s stock in Canada, after agreeing to invest in a PIPE transaction.241
The defendants then used the PIPE shares to cover the short positions, a practice prohibited by the registration provisions of federal securities law, while trying to avoid regulatory scrutiny by employing wash sales, matched orders, and pre-arranged trades to appear as if the short sales were covered by open market shares instead.242 Further, the defendants allegedly made materially false representations to the PIPE issuers to induce them to sell securities to defendants by falsely claiming that they would not sell or transfer the PIPE shares other than in compliance with the registration provisions of the Securities Act of 1933,243 despite intending all along to distribute the restricted PIPE securities in violation of the Securities Act.244 Finally, the SEC argued that the defendants engaged in insider trading by short selling the securities of certain PIPE issuers prior to the public announcement of the PIPE, while using nonpublic information received while being solicited to invest in the PIPE.245 In considering Lyon’s motion to dismiss, the district court determined that the SEC had met its pleading burden with respect to the securities fraud and insider trading claims but not with respect to the claims of unlawful distribution of unregistered securities.246 No final judgment has been reached in the case.
The Lyon case follows an SEC suit against Friedman Billings, an investment bank (now known as Friedman Billings Ramsey Group), which the SEC alleged had engaged in insider trading related to a PIPE the bank arranged for Compudyne. 247 That suit settled for $7.7 million in December 2006.248 The SEC has also targeted a group known as the Rhino Advisers (“Rhino”) in SEC v. Badian.249 The Badian suit alleges fraud and other securities violations in connection with a PIPE transaction and the subsequent manipulative naked short selling of the stock of Sedona Corporation (“Sedona”), a software company.250 According to the SEC, Rhino, representing hedge-fund Amro International, S.A. (“Amro”), lent Sedona $2.5 million in a convertible debt offering, typical floorless death spiral financing.251 Sedona required the investors to agree not to sell the shares short, but Amro, via Rhino, naked shorted the stock anyway, causing the shares to plummet and Sedona to face a cash crisis.252
Issuers are following the SEC’s lead in suing hedge funds. In 2005, Overstock sued Rocker Partners (“Rocker”), a hedge fund, and Gradient Analytics (“Gradient”), a research firm, claiming that Rocker paid Gradient to issue disparaging reports on Overstock, driving down the price of Overstock shares and allowing Rocker, which had short positions in Overstock, to profit.253 Overstock’s lawsuit did not allege naked short-selling, and Rocker claimed that the firm did not engage in naked short-selling, but in the media, Overstock CEO Patrick Byrne has blamed hedge funds like Rocker for naked shorting Overstock stock.254 This lawsuit, based primarily on defamation and intentional inference with prospective economic advantage, survived the defendants’ motions to strike255 and is expected to go to trial in April, 2009.256
C. State Government Lawsuits
Louisiana Attorney General Charles Foti launched an investigation into UBS’s stock-lending practices with respect to Sedona (the Pennsylvania software firm discussed supra), filing motions to compel all of UBS’s electronic and paper communications files relating to Sedona stock, trading records, monthly stock inventories, stock loan documentation, information regarding commission payments, customer account records, market-making activities, clearing and settlement procedures, and in-house research.257 The SEC contends that Sedona’s stock price plummet—from approximately $10.25 a share to less than $0.20 per share—was caused by manipulative short-selling by hedge funds and collusive brokers.258 Illinois and Connecticut are also investigating the investment banks and hedge funds.259
D. Issuer Suits Against Brokerages in State Courts
With little hope for remedies in the federal courts, alleged targets of naked shorting schemes are focusing on the state courts instead. In February 2007, Overstock.com filed a $3.5 billion lawsuit against major brokerage firms in the Superior Court of California, alleging state-law causes of action for conversion, trespass to chattels, intentional interference with prospective economic advantage, and various violations of the California Corporations Code and Unfair Business Practices Act.260 In July 2007, the Superior Court judge allowed the case to proceed, ruling that Overstock’s claims were viable under California law.261 Overstock’s California litigation may illuminate one path to remedies for victims of naked short-selling schemes. State court litigation of state law claims is not a panacea, though; state court litigation is subject to forum non conveniens disputes, forum shopping accusations, and other jurisdictional problems.
V. ALTERNATIVE SOLUTIONS
With no instant remedy from the judicial system, alleged victims of naked short selling have turned to regulators and the legislative branch for relief.
A. Regulation SHO
Although the 1934 Act, when interpreted broadly, prohibits all market manipulation, arguably including naked shorting, federal securities law historically has not provided any specific guidance as to how such market manipulation can be identified and mitigated. In 2004, the SEC crafted Regulation SHO,262 comprised of SEC rules 200, 202T,263 and 203, an attempt to update264 short-selling restrictions and curb delivery failure abuses. Effective on September 7, 2004, with required compliance by January 3, 2005,265 Regulation SHO establishes uniform “locate” requirements, creates a “threshold security list” to identify possible targets of naked short-selling and warn would-be investors, requires broker-dealers to “close-out” FTD positions of these threshold securities, and then articulates exceptions to these rules.
First, Regulation SHO establishes uniform “locate” requirements. A “locate” is the short-seller’s arrangement with a broker-dealer to confirm that it is able to make delivery of the shorted stock. Under SEC rule 203(b)(1), brokers and dealers may not accept short sales unless they have borrowed the security, entered into a bona-fide arrangement to borrow the security, or have reasonable grounds to believe that the security can be borrowed by the delivery due date (the so-called “easy to borrow” exception).266 Second, Regulation SHO requires exchanges to publish daily a “threshold securities” list of companies where at least 10,000 shares or more than 0.5% of the company’s total outstanding shares267 have been shorted and not delivered to a buyer for five consecutive trading days.268 Third, after thirteen trading days, brokers or dealers who are participants of a registered clearing agency must settle, or “close-out,” failure-to-deliver positions in these threshold securities by buying shares “of like kind and quantity.”269 Until the trade is closed out, broker-dealers involved in the trade may not engage in any further short sales of that security.270
Regulation SHO intends to reduce persistent delivery failures, but its exceptions may undermine its rules. Regulation SHO permits legal short sales: (1) when a broker or dealer accepts a short sale from another registered broker or dealer; (2) in bona-fide market making; and (3) when a broker-dealer effects a sale on behalf of a customer that is deemed to own the security pursuant to rule 200271 but through no fault of the customer or broker-dealer does not expect the security to be in the broker-dealer’s possession by the delivery date.272 The effect of the broker-to-broker exemption is that if the brokers trade back and forth between themselves, the thirteen-day clock for mandatory close-outs restarts each time.273 If the brokers trade between themselves indefinitely, they theoretically may never have to settle the naked short positions. The second exemption provides an exception that gives bona fide “marketmakers” who short sell “thinly traded, illiquid stock” extra time to obtain the securities for delivery.274 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.275 Their role is to maintain an inventory of readily available stock, to mitigate volatility, and to manage their own risk; they sometimes need to short shares to accomplish their objectives.276 The problem is that almost anyone can apply to become a market maker, and thus almost anyone, however unscrupulous, can take advantage of the exemption and engage in naked short selling.277 In addition to these problematic exemptions, the SEC reserves the right to grant an exemption, “either unconditionally or on specified terms and conditions, to any transaction or class of transactions, or to any security or class of securities, or to any person or class of persons.”278 In short, the SEC retains significant discretionary power to exempt people and practices from the rules, and such exemptions may not even be publicly known.279 The existence of so many exemptions undermines confidence in SHO’s efficacy.
Perhaps the largest SHO controversy occurred when the SEC “grandfathered in” any failed deliveries before January 3, 2005 in an effort to avoid pre-compliance-date short-squeezes caused by close outs of naked short positions.280 The result was that in the four months between Regulation SHO’s effective date and compliance date, the grandfather provision provided that “anyone who was so inclined a generous period of time to build up naked short positions in any stock he liked. Or, to use the counterfeit analogy, imagine outlawing the printing of funny money, but giving everyone four months to print up as much as they’d like. Only then would counterfeit dollars be illegal—but only to print, not to use.”281 The SEC exempted these failed deliveries from SHO’s close-out requirement.282 The SEC did not submit the grandfather exemption for public comment, and accordingly, it was the most-criticized SHO provision until removed in June 2007.283
Collectively, SHO’s exceptions amount to toothless red flags—SHO helps identify some, but not all, incidents of probable naked shorting, but lacks an enforcement mechanism in that it does not impose unavoidable penalties for failing to deliver and thus does not provide any practical disincentive for naked short-selling.
The SEC claims that Regulation SHO is working, albeit slowly and inefficiently. The SEC credits SHO with helping to reduce average daily FTDs by 34% during the period January 2005 to May 2006 from the period April to December 2004.284 This data is difficult to verify because the SEC does not voluntarily release data on FTDs; Freedom of Information Act (“FOIA”) requests for this information indicate that some companies have actually seen increases in delivery failures since SHO’s enactment.285 Further, SHO critics respond that the threshold securities list simply “turn[s] rampant abuse into a spectator sport”286 and “adds more smoke to the fire”287 in that, while it identifies persistent FTDs, it does not provide information about whether naked short-selling is to blame. In addition, anecdotes suggest that the threshold securities list has unintentionally created more market manipulation, in the form of short squeezes, by identifying stocks where short sellers are presumably active.288 Reportedly, traders make large purchases, through long positions, of some of these threshold securities, which in turn, drive up the prices of these stocks, put pressure on short sellers as their positions lose money, cause brokers to issue margin calls seeking more collateral to protect themselves against default, force short sellers to close out their positions by purchasing more shares, and thus drive the price even higher.289
More certainly, Regulation SHO does not dictate a course of action when particular companies remain on the threshold securities list for months, or even years, at a time. In addition to Overstock.com, well-known companies like Netflix, Inc., Krispy Kreme, Delta Airlines, and Martha Stewart Living, for instance, have been frequent guests on the threshold securities list since it was introduced.290 The list may do a good job in alerting investors, regulators, and the issuers themselves that something is wrong, but Regulation SHO does not take the next step and fix the purported problem.
In June 2007, the SEC amended Regulation SHO to eliminate the grandfather provision.291 SEC Chairman Christopher Cox noted that the amendments were intended to curb “the serious problem of abusive naked short sales, which can be used as a tool to drive down a company’s stock price to the detriment of all its investors” and recognized that “persistent failures to deliver. . .may be due to loopholes in the Commission’s Regulation SHO.”292 In September, 2008, the SEC also announced the elimination of the options market maker exception. 293 Options market-makers are now subject to the same “T+3” delivery rules as all other market participants.294 These amendments and proposals address much of the SHO criticism, but still do not go far enough in mitigating the weaknesses of the threshold securities list paradigm.
B. SEC Rule 10b-21
In March 2008, in apparent response to investor concerns over naked short-selling, the SEC proposed a new anti-fraud rule to “highlight the liability” of short sellers who misrepresent their ability to obtain shares to settle their trades.295 Effective September 18, 2008,296 rule 10b-21, entitled “‘Naked’ Short-Selling Anti-Fraud Rule,” provides: It shall constitute a “manipulative or deceptive device or contrivance” as used in section 10-b of this Act for any person to submit an order to sell an equity if such person deceives a broker or dealer, a participant of a registered clearing agency, or a purchaser about its intention or ability to deliver the security on the settlement date, and such person fails to deliver the security on or before the settlement date.297
The SEC intends this rule to indicate “zero tolerance for abusive naked short selling”298 by prohibiting short sellers from deceiving their brokers about their ability to locate shares. In short, the SEC emphasizes that it is deceptive to deceive. However, rule 10b-21 does not clarify what constitutes deception, or how the Tellabs scienter standard might be met by a plaintiff alleging harm from naked shorting. Further, because the SEC acknowledges that deceptive naked short selling has always been illegal under rule 10b-5,299 it is unclear how rule 10b-21 adds anything new to the regulatory framework. At most, rule 10b-21 acknowledges that naked shorting might be more of a problem than first admitted, while sending a message to manipulative naked shorters that they are on the SEC’s radar.300
C. SEC’s New “Hard T+3” Delivery Rule
On the same day it finalized rule 10b-21, the SEC adopted, on an interim final basis, a new “hard T+3” delivery rule that imposes strict penalties for delivery failures.301 Specifically, if a short-seller fails to deliver within three days of the sale, the seller’s broker-dealer will be prohibited from facilitating any further short sales of that security for any of its customers unless it pre-borrows the shares.302 This penalty ideally encourages broker-dealers to prevent naked short-selling by its customers. This rule does not remedy the instance of naked short-selling which triggered the broker-dealer’s penalty in the first place, however.
D. SEC’s Increased Regulation of Hedge Funds
As a signal of increased oversight of hedge fund short-selling activity, and also in September, 2008, the SEC announced an emergency, temporary order requiring hedge funds and other large institutional investors (defined as those with discretionary accounts of at least $100 million) to disclose certain short positions on a routine basis.303 Initially met with great resistance by the hedge fund industry, which claimed that public disclosure of their trading strategies was unfair,304 the SEC ruled that such disclosures would be kept private by the SEC for a two-week period before public release on the SEC’s EDGAR website.305 The SEC’s move to require increased transparency and disclosure stemmed from a concern that hedge funds were responsible for short-and-distort schemes in which an issuer’s stock is shorted, and false rumors about that company’s viability are then spread, thus driving down the share price and allowing the short-sellers to profit.306 In the wake of the collapse of Bear Stearns, Lehman Brothers, and other financial industry stalwarts, the SEC’s order underscored its commitment to use “every weapon in its arsenal”307 to fight abusive short-selling and consequent market instability. However, once again, despite the good intentions and resulting increase in transparency, it is unclear how the SEC’s order will translate into more accessible remedies for the parties injured by abusive shorting.
E. FINRA Rules
The Financial Industry Regulatory Authority (“FINRA”)308 requires that when one of its members makes a short sale for its own accounts or accepts a short sale for a customer, the member must make a written affirmative determination.309 The affirmative determination must state that the FINRA member will be able to provide the security for delivery on demand.310 This affirmative determination rule limits short selling to the ability to borrow a stock at the time of sale.311 In practice, this rule curbs short sales of stock in companies with small amounts of free trading shares because such companies’ stock is usually more difficult to borrow.312
Until April 1, 2004, however, the affirmative determination rule applied only to NASD members.313 Non-members, like Canadian brokerage firms,314 specialists,315 and options players, were not required to comply with NASD delivery rules.316 In response to criticism, the NASD promulgated a new rule that requires NASD firms to treat non-member broker-dealers the same as members regarding delivery of shares sold through U.S. registered broker-dealers, thus strengthening delivery accountability and reducing naked short-selling. 317 Market-makers, however, are still exempt from the rule.318
Although the FINRA affirmative determination rule should act as a deterrent, if naked shorting nevertheless occurs, investors have no private right of action to sue for these rule violations.319 Investors are left only to hope that the brokerage industry polices its own rule infractions, a hope that may be unrealistic when most of the brokerage industry denies that these rules are violated in the first place. And even when the FINRA enforces the affirmative determination rule, the result for the offender is a fine and expulsion from FINRA membership320 —serious consequences, for sure, but no real remedy for the parties injured by the naked shorting scheme.
F. State Legislation
With little practical relief coming from the federal government, self-proclaimed targets of naked short selling have focused lobbying efforts at the state level. In May 2006, for example, Utah-based Overstock.com, Inc. won a major, but temporary, legislative victory when the governor of Utah signed a bill which would have required brokers to regularly disclose trades that fail to settle.321 The law, which was to take effect on June 1, 2007,322 would have imposed fines starting at $10,000 per day on brokers who accumulate too many unsettled trades in any company’s shares.323
The brokerage industry, represented by the Securities Industry and Financial Markets Association (“SIFMA”; formerly the Securities Industry Association or “SIA”), sued in opposition to the legislation,324 arguing that the paperwork necessary to comply with the law would be cumbersome,325 that federal securities law preempted the state standard,326 and that the legislation violated the Commerce Clause.327 Specifically, SIFMA argued that the Utah law is preempted by section 17A of the Exchange Act, which directs the SEC to “facilitate the establishment of a national system for the prompt and accurate clearance and settlement of transactions in securities.”328
If each state is granted the authority to set its own rules regarding national markets, SIFMA posited, “the resulting labyrinth of regulation would choke our financial system” and negatively affect consumers through increased costs, inefficiencies, and a reduction in “service and innovation.”329 SIFMA suggested that the American financial market would suffer on a macroeconomic level as well, as “[a]lready, companies launching IPOs shop globally for more accommodating regulatory environments. Without uniform national standards, U.S. markets would find themselves at an even greater disadvantage.”330 SIFMA also objected to the Utah law on Commerce Clause331 grounds, arguing that it “regulates wholly out-of-state brokerage transactions and imposes burdens on interstate commerce that clearly exceed the Utah law’s local benefit.”332 Given the courts’ strong position on the preeminence of federal securities law in the suits against the DTCC, discussed supra, SIFMA’s preemption arguments were likely meritorious, as were the Commerce Clause claims, which emphasized the Utah law’s burden on interstate commerce. SIFMA’s litigation campaign against the Utah statute worked. In February, 2007, the Utah legislature voted to repeal the law.333 Similarly, in 2007, Arizona, Oklahoma, and Virginia all considered and rejected short selling bans after being threatened with litigation;334 Missouri is still considering the issue.335
Undeterred by other states’ failures, South Dakota voters are now considering amending their Uniform Securities Act of 2002 to prohibit any broker-dealer who is registered in South Dakota from engaging in short selling and also penalize any sales which do not result in delivery in three days or less.336 SIFMA has again threatened litigation, chiefly on preemption grounds.337
Given that no other state to date has passed legislation to curb naked short-selling, some companies are choosing to reincorporate and affect a custody-only trading rule. Custodyonly trading requires that shares be registered to the holder by name and only be traded in physical form.338 Purchases or transfers of stock must be placed through the issuer’s transfer agent.339 The brokerage industry and investors claim that the rule makes stock less liquid and harder to sell.340 Thus, while companies who incorporate to take advantage of the rule may seek a decline in the naked shorting of their stock,341 they may also find their stock less attractive to legitimate investors who value liquidity. Thus, the typical strategy for a company concerned about the impact of naked short-selling on its stock would be to reincorporate, adopt a custody-only trading rule to effect a short squeeze, and then after the naked shorters make a run on the company’s stock to cover their positions (thus driving up the share price with their higher demand), revise their by-laws to remove the custody-only trading rule.342
G. Other Options?
With state regulations sparse and controversial, and when litigation is unsuccessful or imprudent, what can companies concerned about the effect of naked short-selling on their stock price do? First, companies can encourage investors to demand paper stock certificates by issuing a dividend that may only be redeemed through an exchange of paper shares. Jag Media Holdings, the issuer-plaintiff discussed supra, did just that, in effect creating a short squeeze in which phantom share holders engaged in a price war to acquire real certificates, thus artificially and temporarily inflating the price of the stock. Orbit E-Commerce, Inc. (“OECI”), a communications company, also encouraged investors to demand delivery of their stock certificates from their brokers so that naked shorters would be forced to cover, and the demand for OECI stock would increase, along with the price.343 In addition, companies may request beneficial owner lists and proxies to improve communication with shareholders, encourage settlement of trades, and help identify short sellers. If those strategies fail, companies may choose to reincorporate and require paper-only trades;344 the adverse effect to such a move is that paper-only trading reduces stock liquidity and thus its attractiveness to investors.
Lawyers for issuers allegedly harmed by naked short-selling practices argue that there is a “simple” way to solve the problem: force the DTCC to go into the market and buy any unsettled shares at the end of thirteen business days and then charge the brokerage firm handling the sale.345 Such “short squeezes” could rein in “undisciplined” short sellers, the plaintiffs’ bar argues.346 In response, the DTCC and the SEC contend that the DTCC does not have authority to execute forced buy-ins, and further, that forced buy-ins would increase clearing and settlement risks and could interfere with the trading and pricing of securities.347 Thus, unless the law changes, issuers and investors alike are left only with a caveat emptor warning with respect to future convertible/ death spiral financing, PIPE transactions, and delivery failures.
CONCLUSION
In the naked short-selling blame game, investors and hedge funds sue the brokerages, the brokerages point to the DTCC, the DTCC hides behind the skirts of the SEC, and in full circle, the SEC investigates the hedge funds, all while skeptics question the existence and the extent of the naked shortselling “problem.” Plaintiffs’ lawyers claim that naked short selling is the Holy Grail and could be “bigger than tobacco”348 in terms of damage awards if ever proved. But, so far, litigation has been unproductive, and even occasionally wasteful, in curtailing or “catching” alleged naked short sellers, despite an overall post-Enron, pro-plaintiff trend. Meanwhile, overregulation can do more harm than good in that it can reduce liquidity and efficiency, but the under-regulation to date has hurt vulnerable businesses, including some former Wall Street mainstays.
In the naked short-selling debate, two uniquely American value systems collide: the value of an efficient, liquid, open, nationwide market versus the values of entrepreneurship and the opportunity for young, struggling companies to have a fair shot at success. How to balance those values? One solution rests with the judiciary, who could declare all naked short-selling market manipulation as a matter of law, but then set a high bar for damages assessments by requiring proof of real economic harm. If companies can prove that but for naked shortselling, their stock price would not have declined to the extent it did—a test that requires them to affirmatively prove their business model, management practices, and/or products were not to blame—they deserve a remedy. If they cannot, they do not. The problem with that open-door approach is that while the court system sorts out deserving plaintiffs from frivolous ones, the defendant brokerages, hedge funds, and the DTCC incur legal expenses, discovery burdens, and perhaps undeserved negative publicity.
Another option is to place the burden with the regulators. Rule 10b-21, the recent amendments to Regulation SHO, and movement toward publicly releasing timely information on delivery failures are all good steps for the SEC, but they are reactionary in approach. Thus, long-term, the SEC should consider an overhaul of DTCC systems, including greater transparency, to better curb naked shorting abuses and rebut the DTCC’s persistent refrain of “It’s not our job to regulate or enforce, therefore naked short selling is not our fault.” Further, the SEC must back up rule 10b-21 with more aggressive enforcement measures. FINRA, too, must proactively enforce its affirmative determination rule and consider ways it might better cooperate with the SEC in releasing accurate information about delivery failures and their causes.
Wrongs, no matter how small or infrequent, must be checked with remedies. But until a court declares naked short selling as market manipulation as a matter of law and clarifies the issuer’s and investor’s burdens in proving the occurrence of naked short selling, the practice will continue without a check from the judiciary. And until the executive or legislative branches effect better regulation and accountability, that means there is no real check at all.
http://www1.law.nyu.edu/journals/lawbusiness/issues/uploads/5-1/NYB103.pdf
Philippine prisons are known to be antiquated, grossly overcrowded and dangerous. Perhaps the Founder was better off residing in the U.S.?
At least the bail wasn't set too high for Pearl/Elvira........ or whatever alias she may be currently using.
But speaking of ZNXT, I heard last night that Her Pearlishness has been formally charged with illegal use of alias under Criminal Case # 46240709, Metropolitan Trial Court of Manila under Judge Juliet Manalo-San Gaspar. A warrant of arrest has been issued, bail is set at Pesos 30,000, roughly $ 667.
Re: Marco Glisson Jury Trial date 11/14/2011
By nufced
Here Come da Judge-Glisson 4/22-4/25
« Thread Started Yesterday at 3:56pm »
67 Filed: 04/22/2011
Entered: 04/25/2011
Pretrial Order
Docket Text: PRETRIAL ORDER: Jury Trial set for 11/14/2011 08:30 AM in LV Courtroom 6B before Judge Lloyd D. George. Calendar Call set for 11/8/2011 08:30 AM in LV Courtroom 6B before Judge Lloyd D. George. Trial Briefs due by 11/8/2011 at calendar call at 8:30 a.m.. Proposed Jury Instructions due by 11/8/2011. Proposed Voir Dire due by 11/8/2011. Signed by Judge Lloyd D. George on 4/22/11. (Copies have been distributed pursuant to the NEF - MMM)
68 Filed: 04/22/2011
Entered: 04/25/2011
Order
Docket Text: ORDERED that this case is hereby referred to Magistrate George W. Foley for the scheduling of a settlement conference. Signed by Judge Lloyd D. George on 4/22/11. (Copies have been distributed pursuant to the NEF - MMM)
Re: squid email to wolfbela
From: IBAFT (Rep: 0) Date: 04/21/2011 19:01
Forum: Cmkm Diamonds Inc - Msg #243 Thread #673212316 (Rec: 0)
HIRING A NEW ATTORNEY FOR THE CMKX SHAREHOLDERS
IN THEIR QUEST FOR TRUTH AND/OR PAYMENT:
.....AN ATTORNEY’S PERSPECTIVE
Many of you shareholders know me. I have been a voice in the Paltalk Rooms for several years, coming to personally know and bond closely with several CMKX shareholders, in what I hope to be solid, lifelong friendships. I have no axe to grind here, I am not writing this letter for the purpose of attacking any people personally, I am not seeking compensation, I am not selling a book, nor do I have any agenda - other than to get CMKX truth and/or to have our settlement released. At this stage in the game, I would happily substitute knowing the truth for the release of our payment and the freedom to move on in life without this issue hanging overhead like a dark cloud, raining misery upon our heads in a relentless deluge. Therefore, I make the following comments based upon my own common sense, legal insights, without emotion and 100% concerning business, not personal issues. If my words are an affront to any individuals, please forgive me for I am not seeking to offend anyone, only offer safeguards so that history does not repeat itself and leave us high and dry once again.
As we all know, there is far more to CMKX than meets the eye. It was criminally shorted, it was very likely the subject of a government sting, money may likely have been collected and is being withheld from us - be it for a good reason or not - I do not know. There is speculation about upcoming lawsuits, the dinar, world global settlements, the St. Germaine Trust and a host of other issues that have been tied into any relief payment we are supposed to receive. Personally, I believe maybe 10% of what I hear about these issues, but irrespective whether I am correct or not, it is impossible not to conclude that after 8-years of this roller coaster ride and the endless stream of misinformation and broken promises, that there is far more to CMKX than we are being told.
At first, we tried retaining the services of an attorney in Bill Frizzell, to help us get to the bottom of this mess. I have personally met Bill and spoken to him several times, and I find him a pleasant sort and if I had to catagorize him, he is definitely on the side of good. All the smoke and mirrors otherwise is just that, and nothing more. If another truth ultimately arises, I will be left very surprised. However, I believe part of Bill’s job was to buy time for whatever was to happen behind the scenes with CMKX. I believe Bill had to play several roles, and one of them was the Pied Piper, to lead us right to the waiting room where we continue to wait. Bill does no longer give the regular updates he promised, as neither did Kevin West prior to his resignation - clearly another planted player in this charade. Basically, the ball was handed to Bill to buy time, and after Bill’s usefulness (at least in this department) was over, the ball was handed elsewhere.
That leads me to the retention of attorney Al Hodges. I, too, have met Al. I have spent time with him, I even signed up as a client to his lawsuit that was allegedly a tool to put greater pressure on certain parties to get our money released. Although I had various differences with Al Hodges, and I have also voiced certain frustration about our situation, I have to similarly conclude that Al Hodges is one of the players in this scenario for the good guys and ultimately, does want to see us paid. However, I also believe that Al Hodges was playing a multiple role, one of buying time with the shareholders as well, just as his predecessor Bill Frizzell did before him.
It is not to say that these men merely played the role of placating the shareholders, as both may have contributed significantly in different areas towards us receiving ultimate justice. However, both of these attorneys’ lack of full disclosure and candor indicates that they have a reason to keep secrets from both the shareholders and their clients. If they were truly outsiders who conveniently showed up to help us, they would ultimately prove beholden to us, not to whatever powers that need to keep certain aspects of this case secret.
This discussion leads me to the subject of retaining the new attorney, the one that Jerry/Wolfbella has recommended to shareholders in the Pressure Cooker Room. I have spoken to Jerry before and I find him a very nice man and seemingly, one who strongly desires us to be paid. However, that reserved endorsement aside, questions still need to be asked. Who is this attorney? Is he another person sent to mislead us into a corner of further procrastination? Will he also hold back information from the shareholders and play the same type of cryptic cat and mouse that our former attorneys played with us? I am writing this letter to encourage a very specific road to deal with this attorney to better insure (no guarantees) that history does not repeat itself here, and the shareholders do not get played with the game of Pied Piper once again.
Perhaps the most important matter for the shareholders to consider is the issue of how to make decisions amongst and within the group. Is there a written agreement that allows for the majority to rule? Absent this type of preliminary decision-making protocols, the group is just asking for dissatisfaction and a lack of harmony. This leads my comments to the attorney.
First off, if this attorney wishes to take on this matter, under no circumstance, pay him the entire $25,000 up front. Start with a reasonable retainer fee of a few thousand dollars, holding the rest of the funds in trust to be paid as services are rendered. Let him submit a bill once or twice a month, a bill to be paid after participating shareholders can see exactly what the individual has done to earn these funds - in detail. If you pay everything up front, you stand a greater chance of losing his interest and seeing more large bills of such a nature in the immediate future. If after a few weeks, the shareholders are not satisfied with the progress, they will have the ability to dismiss the attorney and seek help elsewhere, without losing the entire $25,000.00.
Secondly, have a rotating group of shareholders act as a liaison to this attorney, bringing questions to him and FULLY reporting all findings to the rest of the supporting group. There should be at least one attorney within the group who deals with this attorney and oversees certain aspects of his progress, so that a fuller understanding of what he is doing is conveyed to the investors. There are several attorneys on the boards who could take on this role. Irrespective, there should be 100% transparency to all investors, if not, what is this exercise in futility all about in the first place?
Have this attorney specifically spell out a game plan prior to signing with him. Know exactly what he plans to do to get information in advance. Will it be a lawsuit and subpoenas? Traveling to interview witnesses? Freedom of Information Act Requests? Does this attorney have contacts in government? Will he be willing to share the load with other attorneys? The more known in advance, the less there will be disappointments to the participating shareholders in the future and the better the group can stay both focused and united in their cause. Do not make the mistake of not having your own group bound in writing to a cause, with rules and guidelines to control the processes.
Lastly, prior to signing on the dotted line with this particular counsel, how about having several attorneys compete for the work? Several shareholders could propose particular attorneys who could give game plans and whichever one makes the most sense could be the go-to guy. Wouldn’t it be nice to have an attorney with the endorsement of someone like Wes Christian, Patrick Byrne or the like? How about approaching Gary Aguirre, the SEC attorney and whistle blower who exposed the hedge fund naked shorting? Competing attorneys could also work to bring down the costs, although money should not be the only concern in this matter.
Be it known, I do not write this letter because I want the position as attorney. I do not want it, nor would I take a paying position from the shareholders in such matters. I have plenty to gain on my own if we are paid and I do not want any appearance of impropriety in accepting money from the shareholders. I would be willing to volunteer some time to help, but only in a non-compensating capacity. One thing for certain, I would hate to see the shareholders taken for another ride, just to get no answers of significance. Again, all I want is for this nightmare to end.
I offer these insights in the hopes it will help.
Sincerely,
Allan Treffry
http://cmkxunofficial.proboards.com/index.cgi?action=display&board=mofo&thread=8655&page=6#120288
By wolfbela
Re: Attorney Fryar Effort Begins...
« Reply #77 on Apr 24, 2011, 8:47am »
I think it is important to read Allan Treffry's responses to my emails to him, with information, regarding Att. Fryar. Allan and I have spoken recently on several occasions, and I have always enjoyed our conversations. We both have some different views about CMKX, but in the end, we just want the shareholders to be paid..
I felt Allan was not properly informed about Att. Fryar so I sent him some info..
His responses below:
Hi Jerry,
I am so glad to hear that Mr. Fryar is attached to the Wes Christian group. That certainly adds strength to not only his credentials, but his true agenda. You know, we have been misled so many times, it is hard to know who is who in the zoo.
Yes, I wish I would have had more access to information with Al Hodges. I assumed his connection to Robert Maheu, endorsement by Tyler and the corresponding silence by Peter Maheu (PM not discouraging signing up with AH when I wrote him) was a good sign. Unfortunately, in spite of what efforts I did engage to find out about AH, I was played and it was a costly game to me monetarily and time-wise. Also unfortunately, Hodges had allies in Reese, Sheila and BH that were used to help suck me in, try to control me and further deceive the shareholders. Unfortunately, I did not see that sucker punch coming until I was already sucked in.
Again, as stated in the letter to the shareholders, I was not trying to make this any sort of personal attack on you or Mr. Fryar, but merely a statement to help in guiding the processes to insure the greatest chances of success. Although I did not know of Mr. Fryar when I wrote the generalized communication of guidelines to the shareholders, it seems that some of the concerns are already answered. That is not only great to see, it further supports that this man could very well be the right guy for this task. Unfortunately, I am not always able to dedicate additional time to do more research on this matter. It has already cost me so much to date.
Thanks for the links and please remember, we are all on the same side of getting paid. I am just trying to help in lending ideas to the shareholders from an attorney's point of view. I am not seeking to steer this ship, only lend a helping hand if needed.
Be well,
Allan
AFTER READING THE O'QUINN-Fryar newspaper article
He is looking better all the time!
Again Jerry, this man seems highly qualified. He also has the blessing of being attached to Wes Christian, a man who I have spoken to and deeply respect. Please do not take my letter as anything more than it was, a humble letter of suggestion to help a lot of people of whom I am both one in cause and concern, sharing with those shareholders my experience, my knowledge gained through both my success and my failures. I do not want any money from anyone, I am not selling anything, I just want us all paid and I know that if we are misled again, it will be the death-knell in the spirit of the shareholders.
Please know that if you guys need my assistance, I am standing by and willing to donate the time.
Best wishes,
AT
Jerry WB
My God I love this post!
LOL
Turdy from what I can remember your buddy bought you stock from Deli when he was loading up with Deli shares while all of you pumped the hel.l out of CMKX in PalTalk rooms. Don my room was named, what a joke I told Deli to stop and you guys kept him going in other room you guys started...all of you...you're all guilty of perpetuating a fraud if that is what it was rofl while you all pumped in rooms after I kicked you all out of my room. How many were spiffed shares for helping Deli? I'll bet a lot of free shares were giving to room mods etc.. btw I like Deli, much more then I do any of your so-called friends.
Who else are you going to turn on an lie about? Is .... next? This company should be real concerned with you hanging with...I'll watch you turn on them all when the SEC leans on you hard for info...cuz you will sing like a song bird to protect yourself.
It's unfortunate that Willy can't spill the beans a little more on this group's activities. fung, nice job getting a few little tidbits from him.
Certainly Surfit's posts read like someone locked up in a mental institution posting on message boards, but they were effective getting folks attention in a bizarre way. He attracted so many bashers, which helped con some not too bright shareholders into believing there was a huge naked short in the scams he promoted for the RICO clan and their buddies.
By: fungagain
18 Apr 2011, 12:30 PM EDT
Rating: Msg. 3437 of 3459
(Reply to 3436 by raginganny)
Willy, not sure what "buddies" of mine you are talking about? I do recall when you first came over to PCBM though. I'm curious, just for old times sake, if you'd like to tell us what enticed you to get involved? At first I recall you stating you thought PCBM was a bad stock play. Then suddenly you jumped on board and then with CMKX. Did someone pay you to tout? Who was it?
Were you ever working with Turino? Vinny? Treffrey? Love?
How much money would you say McCurdy and his buddies made off of these stocks? Why do they still need the car biz if they got rich in penny stock scams? In your opinion of course, as well as my own.
By: raginganny
18 Apr 2011, 05:12 PM EDT
Rating: Msg. 3438 of 3459
(Reply to 3437 by fungagain)
Here you go...last response on this subject to clear the air...
#1 Willy, not sure what "buddies" of mine you are talking about? Was my post to you? No clue who you are OR WHO YOUR BUDDIES ARE...
#2 I do recall when you first came over to PCBM though. I'm curious, just for old times sake, if you'd like to tell us what enticed you to get involved? Surfit and spamming npct thread with a couple other made me curious then I didn't like pcbm at all. I tried to like it but never could so surfit and these guys hated me and attacked me everywhere at rb even at gbdx and both bmcs threads along with all the mentioned names...what a planned attack rofl...ya I was wrong on gbdx errrr. Not good people imo.
#3 At first I recall you stating you thought PCBM was a bad stock play. Yes
#4 Then suddenly you jumped on board and then with CMKX. Did someone pay you to tout? Who was it? I have never jumped on board with pcbm and was never paid to tout pcbm. To use pcbm and cmkx in the same sentence the manner you did misleads.
ALSO NEVER FORGET THIS "I HAVE NEVER EVER BEEN PAID BY PCBM OR CMKX OR ANYONE RELATED TO EITHER STOCK IN ANY MANNER." I read the crap goldbarren posts and he knew he was lying when he posted I have been paid on either pcbm or cmkx...start backing up these lies with facts...I guess this is why we hide behind alias. goldbarren lies in many of his posts in relation towards me...he knows it rofl..right tec.
#5 Were you ever working with Turino? NO
#6 Vinny? NO
#7 Treffrey? Commutative only and that was my misfortune it even came to that cuz he introduced me to some...all in a depo and on record with SEC about him. Was ironic how this got twisted rofl but like I said the SEC knows the real story that never gets told and because of the depo I can't write about the exact content and won't so I am at a disadvantage.
#8 Love? ??? Frank? Yes long time ago on one of his bs companies he advertised in my rag. Couldn't get me to touch a Love deal again but in a crazy way I like Frank.
#9 How much money would you say McCurdy and his buddies made off of these stocks? No clue but IMO they have lost a lot believing each others bs.
#10 Why do they still need the car biz if they got rich in penny stock scams? In your opinion of course, as well as my own.
Car business is a refuge for slick talking salesmen. Also they like thieves cuz usually they are the fast talkers so they work into the theme of the business. The finance department is the biggest den of thievery in the car biz. These guys know darn well when they rip off a lil ol lady...the salesmen is always in the dark but not the finance mngr who sees every stolen penny and the n he steals as much more as he can. I tried retail after a being a fleet manger for 14 years and retail sucks so between that and my physical problems I left about 4 years ago and don't regret it at all.
They are broke is why they dream. A lot of money and stock has exchanged hands in the group imo but I see and hear they are all scrambling for money and money does turn shills against shills jmo.
ALL THE ABOVE IN MY OPINION!
NO MORE RESPONSE ON THIS MATTER...
LOTS OF BAD KARMA!!!!
The best of Xer madness!
There are very pertinent legal questions that can clear the picture for all CMKX shareholders who are victims in this case. The answer, in my opinion, actually points to the fact that the DOJ Victims Rights Ombudsman should be doing what Al Hodges is doing. The restitution for all victims in this case was already collected, that is clear as none of the brokers who were caught have been included in an actions currently ongoing whatsoever. They obviously made the deals talked about by Al Hodges, and our own company obviously knows about these deals and has to pretend they don’t due to non disclosure, or it would appear that way in my opinion by the evidence I am presenting to you. It is clear to me that the operation Mr. Hodges explains did in fact occur, and given the evidence will corroborate that if subpoenaed, there are many ramifications to that fact becoming public.
It warms my heart to think of the two fish at the bottom of the barrel turning on each other. lol
Too funny!
First Hodges now Delidog.
mccurdydon1: I hope they hang Deli and his pumpers
mccurdydon1: ok whos working late tonight
mccurdydon1: a friend of mine got a call from Paris Wynn of the SEC
mccurdydon1: he ask for him to testify against delidog
mccurdydon1: he said we would never get paid
mccurdydon1: it wierd that they called him out of the blue
mccurdydon1: he is just a working man
mccurdydon1: not on any boards
mccurdydon1: yes he bought shares in 2005
mccurdydon1: there were 3 guys who I worked with who bought and only one got the call
mccurdydon1: its weird out of the blue for him to get the call
mccurdydon1: they are going to fly him into Vegas and put him up in a hotel
mccurdydon1: i might go with him
dopplerdan: I think that the SEC has nothing solid on Deli
mccurdydon1: but I am sure they would have gone the other way if he had not agreed
mccurdydon1: they have him dead to rights
mccurdydon1: according to Paris Wynn
mccurdydon1: I hope they hang Deli and his pumpers
mccurdydon1: like Shelia she was telling everyone that the SEC was getting ready to pay .02 and deli was selling a ton out the back door
mccurdydon1: and then Shelia sold shares
mccurdydon1: the same with Wyatt
mccurdydon1: and then Hodges was paid and he gave them a loan
mccurdydon1: so they can say they were not paid
Here we go again!
When the chit hits the fan squid and lapdog always turn on their pals (even though they were part of what transpired). Anyone who questions their pals, or their motives are viciously attacked on message boards and accuse of having some sinister agenda. The reality is others see how painfully obvious it is what's happening and want them to be accountable for their actions.
Worse yet, these clowns have the nerve later to claim they are the ones responsible for outing their dear old pals and warning shareholders about them. It's too darn laughable.
I think Allan Treffry was the only one who paid a retainer
to Hodges and now because he left the suit because Hodges
could not show any proof of his allegations he wont return any
calls or his retainer or accounting of his money spent does that
sound like a scam?
you be the judge
Okay, I'll judge. ;)
Treffry is himself a practicing attorney. HE made the decision to be a plaintiff. HE made the decision to give Hodges a retainer. As a plaintiff HE was responsible for the allegations made against the defendants. As an attorney, if he was stupid enough to sign on to this lawsuit without first having all the evidence, than HE only has himself to blame.
***Ginger Gutierrez Reply Exhibits***
By 4profit
Ginger Gutierrez Reply Exhibits
« Thread Started Yesterday at 4:03pm »
Government Reply to Pay Scanning
http://www.scribd.com/doc/49883793
Gutierrez Reply to Govt & Exhibits
http://www.scribd.com/doc/49884141
*** MARCO GLISSON Defendant***
Courtesy of nufced
Filed & Entered: 02/22/2011
Minute Order
Docket Text: MINUTE ORDER IN CHAMBERS of the Honorable Magistrate Judge George Foley, Jr, on 2/22/2011. By Deputy Clerk: Julia Wright. RE: [61] Minute Order Setting Hearing on Motion on March 2, 2011:
Out-of-state counsel may appear telephonically. Please dial (702) 868-4910, password 123456, 5 minutes prior to the hearing time. Please remain on the line until such time as the Court joins the call and convenes the proceedings. The use of a cell phone or speaker phone during the call is prohibited. The call must be made using a land line.(Copies have been distributed pursuant to the NEF - JBW)
64 Filed: 03/02/2011
Entered: 03/03/2011
Order on Motion to Extend Time/Shorten Time regarding Discovery or Nondispositive matter
Docket Text: ORDER Granting [53] Motion for Continuance of Date for Filing Joint Pretrial Order. Proposed Joint Pretrial Order due on or before 4/15/2011. Signed by Magistrate Judge George Foley, Jr on 3/2/11. (Copies have been distributed pursuant to the NEF - MMM) Case 2:09-cv-00104-LDG-GWF Document 64 Filed 03/02/11 Page 1 of 1
1
2
3
4
UNITED STATES DISTRICT COURT
5
DISTRICT OF NEVADA
6
7 SECURITIES AND EXCHANGE COMMISSION, )
)
8 Plaintiff, ) Case No. 2:09-cv-00104-LDG-GWF
)
9 vs. ) ORDER
)
10 MARCO GLISSON, )
)
11 Defendant. )
__________________________________________)
12
13 This matter is before the Court on Plaintiff’s Motion for Continuance of Date for Filing Joint
14 Pretrial Order (#53), filed January 27, 2011; Defendant Glisson’s Opposition to Plaintiff’s Motion
15 (#59), filed February 7, 2011; and Plaintiff’s Reply Memorandum in Support of Plaintiff’s Motion
16 (#60), filed February 10, 2011. The Court conducted a hearing in this matter on March 2, 2011. After
17 considering the papers submitted by the parties, as well as oral argument by counsel, the matter having
18 been submitted following argument for decision, and good cause appearing,
19 IT IS ORDERED that Plaintiff’s Motion for Continuance of Date for Filing Joint Pretrial
20 Order (#53) is granted. The Joint Pretrial Order is due on or before April 15, 2011.
21 DATED this 2nd day of March, 2011.
22
23 ______________________________________
GEORGE FOLEY, JR.
24 United States Magistrate Judge
He said he would go on a major drug binge which surprised me
lol
You would think if someone suddenly came into that kind of wealth they would want to remember having a good time.
Seems the Judge is getting annoyed with Deli. Enough of his games
Exactly!
Deli has lots of splainin to do.
He's beyond shameless
If you want to watch Fluffy in all his shameless glory go here.
I couldn't get pass more than one minute before switching it off. Watch how quickly he holds the book up and starts his sales pitch.
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=59920923
whats the excuse for THAT one? Deli was the "all knowing" to a lot of shareholders
who still believe in the mineral superstore
Deli ran out of excuses with both the SEC and shareholders. Deli handled the situation with the SEC badly because of his arrogance. Instead of a slap on the wrist they might go for the kill now.
It seems Canada and the USA could work together for Justice since many Canadian investors were also fleeced?
The Canadians seem content to let the U.S. justice system take care of Urban with a criminal trial. As it should be.
The Canadians took the civil route with Saskatchewan halting CMKX trading and The Alberta Securities Commission getting a default judgement against Urban.
http://www.albertasecurities.com/Enforcement/Enforcement%20Orders/CASAVANT,%20Urban%20-%20RDEC%20-%202010%2004%2008%20-%203489533v1.pdf
Casavant provided no evidence or submissions.
This is no joke.
Captain Fluffy is looking for a movie deal. Maybe he should hook up with Eade? You could broker the deal for them. LOL
By: carmelbeach
16 Feb 2011, 09:08 PM EST
Rating: Msg. 554453 of 554461
(Reply to 554445 by beatenvalue)
Jump to msg. #
ALTOFRAUD SEEKS MOVIE DEAL
http://www.soldshortinamerica.com/
If you're a filmmaker, TV director, producer or film financier and you're interested in the movie of the "Sold Short in America" please click here.
http://ragingbull.quote.com/mboard/boards.cgi?board=USXP&read=554453
http://www.corporationwiki.com/Florida/Boca-Raton/barbara-altomare-P2517294.aspx
Encore Holdings of Delaware, Inc. is located at 44 Wall St Fl 12 New York, NY 10005. The officers include Barbara Altomare. Encore Holdings of Delaware, Inc. was incorporated on Monday, September 21, 2009 in the State of FL and is currently active. Corporation Service Company represents Encore Holdings of Delaware, Inc. as their registered agent.
Good grief this is sickening.
http://www.linkedin.com/in/richardaltomare
Richard Altomare's Publications
SOLD SHORT in America
ENCORE PRESS
Authors: Richard Altomare
This book is a non-fiction, painfully true account of an American whistle-blower whose silencing was attempted by conflicted and vengeful bureaucrats. This work presents oversights within the regulatory Securities and Exchange Commission (SEC), The U.S. Justice Department, and The Bureau of Prisons penal systems (BOP); as an innocent former US Marine and 60 year old grandfather is actually placed in high security solitary confinement for trying to warn the country of the impending financial crisis (now current, admitted, acknowledged, and publicized) and how it could have been prevented. He committed no crime, was never afforded the due process of law or a proper trial, was neither indicted nor convicted of anything, but was incarcerated in solitary confinement for 83 days in an attempt to silence him, while the SEC dismantled his successful public company, which was the holder of a $700,000,000.00 judgment then being litigated against the SEC.
Entertaining and informative, this book presents the issues, actions and utter contempt that many governmental employees exhibit towards all citizens who rely upon them for professional and responsible representation and treatment. It skillfully exposes the reader to an annual 60 Billion dollar prison budgeted sink hole in dire need of investigation and improvement. From the Author’s “Woody Allen type” humor in relaying the horrific reality of our prison systems and governmental agencies, the reader will not be able to stop turning the pages to meet the segments of society and their abhorrent, illegal and unconstitutional actions that this work exposes.
Wonder if/when the SEC will add Ms. Thingamythong to the complaint.
after7 years they can't even bring Urbie in sheesh
Do you purpose the U.S. should start illegally kidnapping foreign citizens so they can stand trial in U.S. courts?
Or should the U.S. follow the extradition treaty procedures?
BTW, Melissa Spooner volunteered to come back to the U.S., or she would still be in Europe.
**SEC Wins Motion in Marco Glisson's Case**
By goodolboy
SEC Wins Motion in Marco Glisson's Case
« Thread Started Today at 12:48pm »
courtesy of Fish&Chips board and it's member Deepthroat:
http://convert.neevia.com/docs/b8d6edb6-4f46-4e44-a860-460a48ceca1b/62.pdf
Looks like we will be seeing exactly who sold and for how much.
http://tfant53.proboards.com/index.cgi?board=general&action=display&thread=5728
UNITED STATES DISTRICT COURT DISTRICT OF NEVADA
Case 2:09-cv-00104-LDG-GWF Document 62 Filed 02/18/11 Page 1 of 4
7 SECURITIES AND EXCHANGE COMMISSION, ) ) 8 Plaintiff, ) ) 9 vs. ) ) 10 MARCO GLISSON, ) ) 11 Defendant. ) __________________________________________)
Case No.
ORDER
2:09-cv-00104-LDG-GWF
This matter is before the Court on Plaintiff’s Emergency Motion to Extend or Clarify Discovery Cut-Off (#50), filed on January 24, 2011; Defendant’s Opposition to Emergency Motion (#54), filed on January 31, 2011; and Plaintiff’s Reply in Support of Emergency Motion (#57), filed on February 4, 2011.
BACKGROUND AND DISCUSSION
On October 29, 2010, the Court granted Plaintiff’s motion to reopen discovery for a period of 90 days until January 26, 2011. The order was based on information provided by Plaintiff that contrary to Defendant Glisson’s previous representations to the Court that he had stopped selling CMKM stock, Defendant and his wife Thidarat Tungwongsathong sold billions of shares of CMKM stock during the year 2010. After discovery was reopened, Plaintiff attempted to notice the depositions of Defendant and his wife for early December 2010. According to Plaintiff, the notices of deposition/subpoena were accompanied by document requests that called for Defendant and his wife to produce financial records, which the Plaintiff argues would have reasonably included bank records relating to the proceeds of CMKM stock transactions. Defendant and his wife postponed the taking of their depositions due to Ms. Tungwongsathong’s medical condition. The depositions of Defendant Glisson and Ms. Tungwongsathong were finally taken on January 10 and 11, 2011.For purposes of this motion, it is not necessary to decide whether Defendant and his wife had legitimate reasons for postponing their depositions. The depositions were postponed at Defendant’s request. The postponement was not due to any lack of diligence on the part of the Plaintiff.
During the depositions, the Defendant and Ms. Tungwongsathong identified accounts at three banks which Plaintiff believes may contain the proceeds from the sales of CMKM stock. On January 24, 2011, the Plaintiff served subpoenas on the three banks for the account records of Defendant Glisson and Ms. Tungwongsathong. Although Plaintiff failed to notify Defendant of the subpoenas before they were served on the banks as required by Fed.R.Civ.Pro. 45(b)(1), it provided Defendant with notice of the subpoenas on January 26 and 27, 2010 and also instructed the banks not to produce records in response to the subpoenas until the Court ruled on Defendant’s objections as set forth in his opposition to the instant motion. Defendant has not formally moved to quash the subpoenas or to obtain a protective order to prevent the banks from complying with the subpoenas.
The Court agrees with Plaintiff that Defendant was not prejudiced by Plaintiff’s failure to provide prior notice of the subpoenas. The failure to provide notice was an oversight and did not deprive Defendant of his opportunity to object prior to the production of records. The subpoenas were not rendered invalid by the failure to provide notice. Because Defendant was not prejudiced and there is no evidence of bad faith by the Plaintiff, an order quashing the subpoenas or imposing other sanctions on the Plaintiff is not warranted. See Shell v. Hilliard, 2007 WL 509263, *2-4 (E.D. Tenn. 2007).
The Court also finds that Defendant’s Glisson’s and his wife’s bank records are relevant. Rule 20 26(b)(1) of the Federal Rules of Civil Procedure authorizes the parties to obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense. Relevant information need not be admissible at trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence. Even after the 2000 amendment which narrowed the scope of discovery to matters relevant to a claim or defense, the rule still contemplates liberal discovery and relevancy is broadly construed. U.S. E.E.O.C. v. Caesars Palace Entertainment, Inc., 237 F.R.D. 428, 431 (D. Nev. 2006). The court in Phoenix Solutions, Inc. v. Wells Fargo Bank, N.A., 254 F.R.D. 568, 575 (N.D. Cal. 2008) states that “the rule contemplates discovery into any matter that bears on or that reasonably could lead to other matters that could bear on any issue that is or may be raised on the case.” 4 Wright, Miller & Marcus, Federal Practice & Procedure, §2008 (2010), page 134, n. 31, cites numerous other cases which state that discovery under the rule is liberally construed. The bank records are relevant to Plaintiff’s requests for injunctive relief and disgorgement of income or profits.
Generally, the requesting party must serve discovery requests sufficiently before the discovery cutoff date so that the other party may respond prior to that deadline. See Bishop v. Potter, 2010 WL 2775332 (D.Nev. 2010) and Andrews v. Raphaelson, 2007 WL 160783, *6 (D.Nev. Jan.12, 2007). See also Thomas v. Pacificorp, 324 F.3d 1176, 1179 (10th Cir.2003) (stating that discovery requests served on the date of discovery cut off would be untimely); Smith v. Principal Cas. Ins. Co., 131 F.R.D. 104, 105 (S.D.Miss.1990) (holding interrogatories served six (6) days prior to the discovery cut off were untimely); Brooks v. Johnson & Johnson, 1990 11 U.S. Dist. LEXIS 8144, *3, 1990 WL 92569 (E.D.Pa. June 28, 1990) (holding requests for discovery must be made with “sufficient time to allow the answering party to respond before the termination of discovery”); Northern Indiana Public Serv. Co. v. Colorado Westmoreland, Inc., 112 F.R.D. 423, 424 (N.D.Ind.1986) (stating that it is “common sense” that requests must be made with sufficient time to respond before the deadline). In this case, Plaintiff attempted to schedule the depositions of Defendant and Ms. Tungwongsathong in early December 2010, which would have allowed Plaintiff sufficient time to engage in follow-up discovery based on information disclosed during the depositions. It is undisputed that Plaintiff was not made aware of the subject bank accounts until the January 10-11, 2011 depositions. Because Plaintiff was not at fault for the taking of these depositions late in the discovery period, it is reasonable to permit Plaintiff to subpoena the bank account records. Although the Plaintiff probably could have served the subpoenas prior to January 24, 2010, the Court also finds that this delay was not so substantial as to justify denying the Plaintiff the right to subpoena and introduce the bank records as evidence in support of its claims.1 Accordingly,
1 This order is not intended, however, to preclude Defendant from asserting other objections he may have to the introduction of the bank records at trial.
IT IS HEREBY ORDERED that Plaintiff’s Emergency Motion to Extend or Clarify Discovery Cut-Off (#50) is granted. Discovery is hereby extended for the sole purposes of permitting the Plaintiff to obtain records pursuant to the six subpoenas issued to the three banks on January 24, 2011 and to supplement its Rule 26(a) document disclosures in regard to such records. No other discovery is permitted.
DATED this 17th day of February, 2011.
______________________________________ GEORGE FOLEY, JR. U.S. MAGISTRATE JUDGE
Krazy people never stop. I sincerely hope Al will be disbarred
Stay tune!
by redlion
Re: Post to Wolfbela - from Tramp's board
Wolfe ask me to post the following.
Shareholders,
I did not officially step down from the AG movement. I told Mike I was considering it as I was tired of the coddling of certain individuals that had shown disdain to AG coordinators and AG shareholder participants, such as in board bannings and the lack of respect for the discussion of both sides of this issue, not just the one that is being sthingy fed to all....the one where dates come and go and the same crap gets rehashed.
I guess Mike decided on my resignation. To be bluntly honest, the AG effort would have been dead months ago had I not gotten on the phone and convinced states that said they would not participate to get involved. Due to my calls, almost every state I talked to decided to take a deeper look at this. One state, a very important one, got involved without one shareholder letter.
The states will end this for us. There is no doubt in my mind. The machine is in motion and can't be stopped. There will be those that will believe to their graves that no matter what anybody says, it can't be true. That is the product of a very severe brainwashing. We have been stroked along by some very skillful people. There is deceit on all levels here.
For those that question my actions, I have not posted any document to harm anyone that was not public knowledge. I also have never made a prediction or posted false information. To those that think all those stock transactions were transfers, you are sorely mistaken. I have been sending information to the states for months and they still accept it willingly and added to their extensive files on this matter. So if there was any question to the validity of my actions, the states would have shut me off long ago.
Just yesterday I got back a response after passing along the latest lt.kk post of Cottrell seeing his money.. this reply came back to me from a State Securities Bureau Enforcement Chief..
Right. Do not spend it all in one place
The authorities know this is all BS.. For anyone who wants to check, my complaint filed with the CA Bar was taken seriously and an inquiry was opened up. The inquiry # is 11-10492. You can call and check it out. They won't tell you anything, but I did receive a letter that an investigation is underway and I will be informed of the results..
No sane person or state securities enforcement attorney can read this pablum day in and day out and not think something is amiss here. You can all believe what you want. I know better. I am waiting on an official letter that I will post somehow for all to see, hopefully, this week, that will show, that once again, all the people you think are working for you so diligently, are not..
I am going on with a few actions yet that I have started. There is not much more to do even if I was an "official" AG national coordinator, which I still consider myself to be, as I am the only person with all the state contacts and the only person that has been in contact with all the offices.
I thank the wonderful great state coordinators that I have communicated with and I wish all the best and a timely and honest resolution to this drama, which has gone on way too long.
Sincerely,
Jerry WB
Finally! We really are starting to get somewhere...
But he hasn't folded his tent yet..we must wait till the end
jimmy, if the info below did indeed came from Krazy Al, then it looks like Bonney and Cottrell are the ones trying to fold up their tents. After all, why do they need to continue this farce when the Krazy Al CMKX era is done. They also used Leo Wanta to their benefit until he was no longer useful to them.
Hardly anyone is left who believes a dang thing out of Krazy Al's camp. Treff and saltydog have abandon the appeal motion. Treff's one talent is knowing the exact moment to bail out of these wacky situations he gets himself into.
eggie and the rest of the gurus are also disappearing. All that is left will be the 9th Circuit Court of Appeals sticking the final fork in it.
lt.kk
Senior Diamond Miner
Re: gossip discussion, etc. 2/14 ->
« Reply #46 Today at 5:42am »
--------------------------------------------------------------------------------
Hi Millie: It is not a rumor. Al knows that Cottrell can see his money but has not gained access yet. When he does, as Tramp says and I believe will be any minute, we are in level 3 and will be paid. All is being worked on now and should come to a conclusion quickly. Dizardos post has 1 glaring error. Things are not the same with the WGS as last year. Bonney has his funds and will oversee the distribution of said funds under the direction of the Chinese Delegates. Bonney was funded as of last Thursday the 10th of Feb. He did not have his funds last year. Lt.KK
Altomare is INSANE if he believes this crap
UGH!
It was so nauseating I had to shut it off. Are we to assume that no attempt at rehabilitation means Fluffy is a hopeless case?
they don't even seem to be interested in Urban anymore
Really?! Who was the person from the DOJ that told you that?
Because their website seems still interested in all the defendants.
and who is Gus?
You know gus. The guy that had Andy Hill help him write stuffium.
Did he back this up with a real bet? Nope.
LOL Of course not!
Why? because he does not believe his own lies
ladiespa to put it kindly is umm............. a special case. He's not even an Xer. ladiespa lost his marbles over the PCBM scam.
Saved for future reference.
By: ezaltheladiespa
15 Feb 2011, 08:22 PM EST
Rating: Msg. 996673 of 996678
(Reply to 996654 by lilburrito0)
lilburrito...One thing that I can guarantee you...let me say this one more time....GUARANTEE you....
URBAN CASAVANT OR ANY MEMBER OF HIS FAMILY WILL NEVER SPEND ONE DAY IN PRISON....EVER.
So you can come here and play your song ONE DAY CLOSER to amuse yourself.
- - - - -
I like the attention. Guess I got to start again
LOL
Oh dear! Valentines day is over.
Dam It is hard to follow rules and be nice to you
Yeah, but have you notice the personal attacks against you have also decrease?
Mission accomplish!
Some interesting tidbits.
By freparkng
Transfer On-Line Records
« Thread Started Today at 4:41pm »
Wolfe asked me to post the following.
http://www.scribd.com/doc/48910849/TA-Transactions
I'm also including the following links.
http://www.scribd.com/doc/48179564/Deli-Exhibit-11-57-12
http://www.scribd.com/doc/47636704/SEC-Interim-Glisson
Another fact which has come to light is that Plaintiff Robert Holanek (Bob Hollenegg) has stated many times that none of the plaintiffs have sold shares. Seems Mr. Holanek's comments are inaccurate as the Transfer Online Records show this not to be the case.
http://www.scribd.com/doc/48910849/TA-Transactions
On Page 19 of the enclosed file, Plaintiff Reese Hamilton transferred/sold 45,000,000 shares.
On Page 42 of the enclosed file, Plaintiff Sheila Morris transferred/sold 49,000,000 shares.
On Page 77 of the enclosed file, Plaintiff Reese Hamilton transferred/sold 110,000,000 shares.
Page 18, Merrill Lynch returns stock to Cede & Co., (DTCC), possibly to cover a short in the stock
Page 18 Peter Brennan returns or sells stock to Cede & Co., possibly to cover a short in the stock.
Page 23, Ameritrade claims to some shareholders they have no stock to cover and issue certificates,
have told some shareholders this for years, yet this record shows that they have a certificate for 710, 571,597
shares, that they were probably forced to break to issue a certificate to the shareholders that requested one.
Page 47-48, Morgan Stanley turns over 408, 614,912 shares to Cede & Co.(DTCC), possibly to cover a short
in the stock.
Page 50, Charles Schwab issued their holding back to Cede & Co., (DTCC) possibly to
cover a short in the stock.
Page 60, Raymond James issued their holding back to Cede & Co., (DTCC) possibly to cover a short in the
stock.
Page 61, Cede & Co., (DTCC) issues 82,861,231 shares to Jeffrey Thompson.
Page 65, Transaction ID 141-986, 3,442,116,000 shares are just cancelled. Where did they go?
Page 66, Ameritrade claims to some shareholders they have no stock to cover and issue certificates,
have told some shareholders this for years, yet this record shows that they have a certificate for 763,282,213
shares, that they were probably forced to break to issue a certificate to the shareholders that requested one.
Page 66-67, Transaction ID 142-004, 294,500,000 shares are cancelled. Where did they go?
Thank You!