InterDigital Inc (IDCC)

[Thanksformusic]

OT: Article on Illegal Trades -- Danny Detail, if you have the time and could comment on this, I would appreciate it.

Thanks.

http://www.investigatethesec.com/20061108.htm


STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud





Illegal Trades; where do they originate – November 7, 2006

David Patch



The US stock market is touted as the greatest capital market in the world. This distinction is based on the perception that the US capital market is one of the safest to invest in and that continued growth in these markets is evidenced by the success of the financial institutions that operate these markets.



“If you protect us, we will come.”



But somewhere along the way, perception and reality have diverged.



In 2003, Regulation SHO was heralded as the most sweeping reform to short selling in over 60 years. Such acclaim comes after the SEC admitted that illegal shorting [naked shorting] existed in our markets and that leverage from such illegal trades was being used to manipulate our publicly traded securities.



By 2005 the SEC again admitted that problems persisted in the short selling process and that the illegal trading remained due to loopholes placed in Regulation SHO. While the SEC analysis of the extent the problem remains differs greatly from that of economists, the fact remains that the problem exists and that public companies and private investors are paying the price.



And while some $6 Billion in unsettled trades exist on the books each trade day, who originated these trades and who ultimately executed these trades remains unknown. While a persistent fail is recorded, the owners of such a fail remain anonymous because the regulators apparently are unwilling to investigate or unwilling to prosecute those that manipulate our markets.



According to documents obtained under the freedom of information act, on January 3, 2005 nearly 589 Million shares remained unsettled over a distribution of 1886 companies. That averages out to over 310,000 shares per company. Fifteen months later on May 31, 2006 the level of unsettled shares had grown to a level exceeding 670 Million shares distributed over 1992 companies for an average of 336,000 unsettled shares per company.



While the SEC considered this a success, the reality is, unsettled trades continued to dominate trading in localized public companies and the market values of these companies reflected such a condition.



In July 2006 SEC Chairman Chris Cox went so far as to say "While preliminary data indicates that Regulation SHO appears to be significantly reducing fails to deliver without disruption to the markets, there continues to be a number of threshold securities with substantial and persistent fail-to-deliver positions that are not being closed out under existing delivery and settlement guidelines."



Mr. Chairman, and why are these persistent fails not being forced closed out by the agency?



According to SEC spokesman John Heine, the SEC does not force the settlement of such fails because the SEC is not in the business of enforcing contracts and a trade is a being considered nothing more than a contract between two parties by the agency. Or maybe, just maybe, the SEC does not force trades to settle according to the present securities laws because the SEC does not want to disrupt the profitability of those that take advantage of such illegal and disruptive trades.



When two interpretations of the law can come into conflict the SEC, the top regulator for these markets, has decided to err to the side of fraud over investor protection. Illegally executed contracts between two broker-dealers, representing third party investors, apparently taking precedent over the laws passed down by Congress decades ago requiring that all trades settle promptly. Why, because the SEC believes in a theoretical Wall Street honor system. An honor system dependant on Wall Street putting aside the conflicts of interest between securing bottom line profits and investor rights when the two may clash.



Yet, Investors somewhere must be benefiting from the fact that “naked short sellers enjoy greater leverage than if they were required to borrow securities and deliver within a reasonable time period, and they may use this additional leverage to engage in trading activities that deliberately depress the price of a security.” [SEC Release No. 34-48709; File No. S7-23-03]



Simply consider who it is that can get away with selling more than 600 Million shares without being forced to make good on the contract. Do you really think a broker would allow the average retail investor to place a sell order for unlimited shares they could not make delivery on to the buyer?



No way, such privilege requires power and money and those people require protection if our markets are to continue to grow.



Fact is, the SEC has the power and the authority to research exactly who it is that is responsible for the failed trades but choose not to look under that rock in order to protect the “profitability and growth of our capital markets.” The SEC operating under the belief that it takes disinformation to expand our capital markets and the biggest segment of disinformation is that our markets are safe and that Wall Street revenues stem from fair, sound, and ethical business practices.



Over the past five years the Commission has moved from the opinion that illegal shorting abuses does not exist to admitting it exists but only to a finite level to finally admitting it is a serious problem. During these same five years, literally hundreds of billions of shares in unsettled trades have been illegally executed representing tens of billions of dollars. And over this span, the SEC has failed to come clean with who it is that keeps executing these trades.



If the books of Wall Street are such that those that execute trades illegally can not be identified, how safe can our markets really be? How can the US promote globally the safety in placing your private wealth or public companies future into our markets when the top cops can’t even follow billions of failed trades and understanding where the abuses are originating?





For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006