CMKM Diamonds Inc. (fka CMKX)

[pennypauly]

OT: STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud



FOIA Data Provides Insight on SEC’s Misrepresentation of Facts; Market Manipulation Continues – May 28, 2006

David Patch



In November 2005 I documented the odd trading patterns I witnessed in a small Jackson Mississippi egg farm called Cal-Maine (NASDAQ: CALM). Cal-Maine had caught my interests based on the steady decline of the stock share value during a period in which the stock was listed under Regulation SHO as containing a large percentage of settlement failures. With large buy-side demand to cover fails in the system, and with heavy volumes, I could not understand how the stock could continue to trade down in value day in and day out.



What I noticed, and reported to both the NASD and SEC, was that the stock had appeared to be experiencing a classic “bear raid” by the very Wall Street participants we entrust to protect our financial portfolios.



The stock, which was trading at $12.00/share in December 04 /January 05, was trading at less than half that value simply 5 months later under tremendous sell side pressure. During this period in time the stock was listed under Regulation SHO as a threshold security and the reported short interest in the stock had reduced from nearly 85% of the public float to merely 28%.



Looking closer at the data, Cal-Maine was experiencing a pattern where stock valuation, short position, and trading volume were all trading in an exact parallel. They were all moving down in sync with one another as if there was a relationship between the three.



The argument I made in November 05 was that Wall Street was manufacturing volume to drive investors out of the stock to allow the fails to deliver to cover under a panicked market and thus to cover for profit. Effectively, Wall Street was manipulating the stock to protect the self-interests of proprietary house and client accounts that were liable for the prior executed trade failure.



To prove this argument I needed one last point of evidence and that arrived this past week as the SEC provided the aggregate continuous net settlement failures for Cal-Maine under the Freedom of Information Act.



Before I inform you of the results understand that by this time the SEC has publicly stated that Regulation SHO was a success. The SEC claims that the number of failures to deliver, as reported by the DTCC Continuous Net settlement (CNS) report, was being reduced which was the intent of Regulation SHO. The SEC also identifying that the success was being recognized in that the “grandfather clause” that was introduced to mitigate market volatilities associated with short squeezes had also been successful. No short squeezes were occurring.



The question that remained was, was the SHO success simply smoke and mirrors? Had the SEC drafted law that forced the industry to respond with additional market abuses to cover up the fraud the SEC grandfathered under Regulation SHO?



If you believe the data provided by the SEC under a FOIA request, the answer is yes. Yes SHO reduced the potential for short squeezes that would impact those that sold shares that did not exist but, instead of investor protection the SEC carefully watched as “Bear Raids” of downside volatility were being used to maintain financial stability of Wall Street institutions, hedge funds, and the short seller.



On January 10, 2005 the NASDAQ reported a short interest in Cal-Maine of 8.5 Million shares. With a public float of 10.5 Million shares this represents 85% of the public float as being shorted. But what was not being shared with the investing public was that 2.5 Million shares, nearly 30% of the total short position had been categorized as a fail to deliver.



Wall Street had allowed 25% of the public float to be sold off shares that did not exist. Shares sold Naked Short.



Under Regulation SHO, these 2.5 Million fails to deliver would be grandfathered from any specified time limits regarding mandatory close-out because the SEC feared a “short squeeze” would transpire due to the excessive forced buying volume. These fails to deliver would however have to be reduced.



With the stock trading at $12.00/share, an 85% short position, and a 25% fail to deliver margin, the stock began trading heavy volumes in 2005. January 05 averaged 425,000 shares daily in trade volume.



By February 05 the stock was now trading down and by the next NASDAQ short report on February 10 2005 the stock was at $10.00/share and held a short interest of only 7.3 Million shares. As for the CNS data recorded at the DTCC, the FTD’s had been reduced to 1.5 million shares from the previous number of 2.5 Million FTD’s. The number of short positions and fails to deliver matched up perfectly and fortunately for the seller of those FTD’s the stock had depreciated by 17%.



If you calculate using averages, the 1 million FTD’s that was cleared from the Cal-Maine’s market was done so at an average profit of $1.00/share. The news is great for the client holding the short interest but bad for the long shareholder now writing off a loss.



By May 05 the data continued to trend as expected. On May 10, 2005 the reported short interest in Cal-Maine had been reduced to 2.8 Million shares, the reported FTD’s had been reduced to 1.2 Million shares, and the stock valuation was now merely $6.80. The April trading volume that led to the May short report had been reduced to an average trade volume of 224,000 shares.



Somehow, the market in Cal-Maine had traded down 43% at a time where short coverings were being required to close out the excessive fails in the system. With each month that was passing, the stock price, reported short position, reported FTD’s, and average trade volumes were all moving in the same direction – Down!



To understand how this works, consider that it takes liquidity to close out a fail if there is no real market of sellers out there to sell into your needed purchase. Those firms holding the FTD on the books do not want to have to buy into the market to close out the fail, but instead wish to have a seller come to them which allows for profitability and eliminates any potential for a short squeeze that would put the remaining FTD’s held on their books into margin call jeopardy.



Fast forward now to August 10, 2005, the stock was now trading at $6.19 after dipping into the $5.70 - $5.80 range during the months of June and July. The reported short position in August was now 1.7 Million shares. The 85% short interest in January had been reduced to a 17% short in August.



By similarity, the FTD’s reported for August 10, 2005 was now only 311,000 shares. And to follow suit, the average trading volume that was leading in to these reported numbers had been reduced to an average of only127,000 shares/day.



For Cal-Maine, the reported short position was reduced by 80%, the reported FTD’s was reduced by 87%, and the average daily trade volume was reduced by 70%. For all that, the stock was now trading at 50% of the value it was just 8 months 7 months previously.











Cal-Maine eventually came off the Regulation SHO list in September 05 after those that initially manipulated the stock had cleared away. Once Cal-Maine did come off the list the volume all but dried up completely as Wall Street no longer needed to work the stock to clear their profits. By October 05 the average daily trading volume in Cal-Maine represented a paltry 75,000 shares/day.











The conclusions of this analysis are that Regulation SHO is not the success that the Commission touts it to be. By creating the grandfather clause into the rule, the SEC forced the Institutions to take drastic measures to eradicate the fails that had previously generated off illegal trades and to do so for a profit, Wall Street was forced to manipulate the value of securities.



In the case of Cal-Maine, Wall Street introduced sell side liquidity into the market driving stock valuations lower and lower and driving investors out of the stock. In January 2005 there were investor portfolio’s that contained an aggregate total of 32 Million shares (23.5M Outstanding and 8.5 Million reported shorts) for a market value of $384 Million. But by September that number was 24.5 Million shares and a market value of only $147 Million.



The manipulated covering of these FTD’s aided in a loss of $240 Million in investor holdings.



To illustrate this liquidity raid further, consider critical data points from the SEC. On February 18, 2005 the stock had closed at $9.88 and had a FTD of 1.44 Million shares. The next trade day say 856K shares trade as the stock traded down $0.50 to $9.30. But the settlement of these trades executed showed up 3 days later at 1.1 million FTD’s. Over 1/3 of the volume recorded that day was buy-side settlements and yet the market traded down 6% on no news.



I this case, I believe evidence will show the market makers created an early panic in the stock by naked shorting additional shares and then covering those initial trades as well as a significant amount of earlier fails during the panicked sell off.



But this was not the only example where logic leads to manipulative activities.



Take for example March 2, 2005. At the close of business on March 2 the stock was listed as trading at $10.11. The reported fails at that time was 1.26 Million shares. The next day the stock was trading down to $9.84 on light volume of 177,000 shares. But review of the trade settlement data for the T+3 for that day the FTD’s had increased from 1.26 Million to 1.4 Million shares. An increase of approx 160,000 FTD’s on a trade day that traded only 177,000 shares with the stock trading down 3% for the day.



As with the example earlier, episodes of manipulation of this type riddle the recoded analysis of Cal-Maine.



In February 2005 the NY Times ran a story by Floyd Norris on Regulation SHO. In that story Norris quoted then Director of Market regulation Annette Nazareth as stating that investors claiming SHO was inadequate where simply whining that there stock prices did not go up with the new law. Today, the data obtained out of the SEC call easily dispute these claims as those that claimed SHO was a farce can now show the proof.



The SEC bailed out the past occurrences of fraud by providing the industry with a get out of jail free card on past settlement failures. The stipulation, clean them up. How they cleaned them up was as disturbing as the clause itself. Wall Street manipulated the markets in stocks to drive investors out in an opportunity to cover the failures at a profit.



Today Annette Nazareth sits as a Commissioner on the staff of the SEC. As part of the rule making process Ms. Nazareth has taken this issue of market abuses and insured that the rights and protections of the Institutions is put before the rights of the investing public. She does so in violation of the oath taken as Commissioner and in violation of federal Laws as defined by the Exchange act of 1934.



Market manipulation is a violation punishable by both civil and criminal means. Those aiding and abetting such violations are equally subject to such punishments. The data recently obtained from the SEC under the Freedom of Information act validates the concerns so many have Investors have spoken of for decades. To continue to deny the investors the rights to a fair market places the Commission staff on a train leading to possible violations of aiding and abetting fraud.



Wall Street attempted to destroy Cal-Maine and the financial security of the investors putting their savings and retirements in this company. Wall Street did so out of greed and for higher executive compensations. But Wall Street has not stopped with Cal-Maine. It is systemic and the SEC must stop this abusive practice or explain to a federal committee why they should not be prosecuted for aiding and abetting such crimes against our nation.







For more on this issue please visit the Host site at www.investigatethesec.com .

Copyright 2006



jcline
Market Reform Analyst

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