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Tuesday, 07/16/2019 9:26:46 AM

Tuesday, July 16, 2019 9:26:46 AM

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SmithOnStocks (currently) 9 PART SERIES on STOCK MANIPULATION

Part 1 in a Series of Reports on Blatant, Widespread Stock Manipulation that is Enabled by Illegal, Naked Shorting

I am convinced that price manipulation by Wall Street bad actors is endemic in the capital markets and swindles legitimate investors out of billions of dollars each year. This criminal enterprise is particularly directed against the stocks of emerging growth companies that are at the cutting edge of technological innovation and jobs creation and are so critical to solving humanity’s greatest challenges. Because my research deals with biotechnology, I am most aware of innumerable, vicious attacks on biotechnology companies, but the scheme is perpetrated on all types of companies, primarily small but also large.

I wrote an extensive report in 2015 that focused on the central role that illegal naked shorting plays in this sophisticated, criminal enterprise. At that time, I was aware of several determined efforts to try to expose and end the scheme which focused on trying to first shed light on the manipulation, get the SEC to step in and/or to bring lawsuits. They went nowhere. Indeed the stock manipulation has actually intensified and the perpetrators have grown ever more brazen over the last four years. I had grown despondent because it seemed that there was no entity that could take on and stop these abusive bad actors.

PART 1

Part 2 in Series on Illegal Naked Shorting’s Role in Stock Manipulation- Conventional Wisdom on How Short Sales are Executed

The current conventional wisdom on how a short sale is transacted is that a short seller borrows stock from a specific investor who is long the stock, then at some later point buys back the stock in the open market. They then return the stock to that “same specific investor” from whom it was borrowed. Before I met ShareIntel, this is what I thought happened, but as I began to work with them and to do more research on my own, I was jolted when I realized that this is not what goes on in the real world of Wall Street and in later reports I will address how the actual process facilitates widespread naked shorting that enables stock manipulation by some hedge funds..

I am writing this to describe to you my original thought process which I believe reflects current, incorrect conventional wisdom. In later reports, I will describe how I changed to a new perspective on how shares actually are handled in a short sale. This led me to an entirely different understanding on how shorting and in particular naked shorting is actually done in the real world. There is some complexity in explaining this and as I mentioned previously, I prefer to write a series of reports dealing with narrow issues rather than penning one huge, complex report that no one will read in its entirety. In the end, I will attempt to bring it all together. As I teased in part 1 of this series, the answer to combating naked shorting lies with the “borrow rate”, but it is too early to go into this.

PART 2

Part 3 in Series on Illegal Naked Shorting’s Role in Stock Manipulation – Prime Brokers and the DTCC Have a Troubling Monopoly on Clearing and Settling Stock Trades

Clearing and Settling of Stock Trades

Most of us when we enter a buy or sell order for a stock give almost no thought to how key aspects of the trade are carried out. We have great confidence that the trade will be handled in accordance with our instructions and accurately reflected in our brokerage account. To do so, there are three components involved in each stock transaction.

Clearing is the process of updating the accounts of the parties involved on the two sides of the trade to arrange for the transfer of securities and money. This is done through Prime Brokers and the Depository Trust & Clearing Corporation (DTCC), which is a company privately owned by Prime Brokers. A Prime Broker (aka broker dealer) can sometimes clear their own transactions by moving shares from one of their customer accounts. If the transaction cannot be completed within the account base of the Prime Broker, they turn to another Prime Broker and clear through the DTCC. Only member Prime Brokers may directly use these clearing services of the DTCC. Investors and non-member brokerages gain access through having accounts with member firms. It is the responsibility of Prime Brokers to ensure that the securities are available for transfer and that the counter party has adequate funds to pay for the transaction.

Settlement follows clearing and is the simultaneous process in which securities are delivered in exchange for payment, usually money.

Central Certificate Depository There is a centralized depository for securities operated by DTCC which holds the paper stock certificates and allows ownership to be electronically transferred through a book entry rather than the physical transfer of stock certificates. This allows brokers and financial companies to hold their securities at one location where they are immediately available for clearing and settlement. This is where your brokerage account is lodged.

For one trade, execution of these three components is no big deal, but think about the staggering number of trades that are made each day. Stock trading in the US results in the clearing and settling at the end of each day of somewhere around 6 billion shares which are involved in perhaps 1 million trades (obviously day to day trading activity can vary significantly). This trading is done in something around 1.5 million securities issued by companies that have a combined value of over $30 trillion. The current US system is all automated and has to be able to cope with the volume spikes and market volatility that we are all too familiar with.

PART 3

Part 4 in Series on Illegal Naked Shorting’s Role in Stock Manipulation: Who are the Key Players?

I worked on Wall Street as an analyst for nearly 40 years and was involved in the stock market on a day to day basis. Throughout this time, I was focused on fundamental developments that would give an insight into the potential for a company to grow its sales and profits and then trying to translate that into future stock performance. Like many investors, I believed that this was the overarching factor in predicting future stock performance. I had no inkling and I would have been shocked if someone had told me ten years ago what the experience of the past decade has taught, i.e., in many, many cases (particularly for small companies) fundamentals are not the most important factor determining the stock price.

I left Wall Street some time ago and after a while started my blog SmithOnStocks, with a strategy of focusing on small, under covered biopharma companies. I proceeded to make recommendations based on the belief that if a company achieved an important milestone as in a clinical trial or regulatory development that the stock price would go up, but this seemingly irrefutable approach just wasn’t working. I saw in case after case that stocks were going down on unquestionably good news and were being obliterated on disappointing news. It just wasn’t one or two stocks. It was the case with many small stocks that I was following both closely and from afar. An exciting new development would paradoxically lead to a stock price decline. I have come to believe that this is the result of a routine business practice on Wall Street perpetrated by hedge funds and aided and abetted by household name financial institutions who enable illegal naked shorting.

PART 4

Part 5 in Series on Illegal Naked Shorting’s Role in Stock Manipulation: Traditional Shorting Compared to Naked Shorting (Both Legal and Illegal)

This is the fifth blog in the series that I am writing to describe how illegal naked shorting is used broadly and massively to manipulate the stock prices of (primarily small) companies. I have been studying illegal naked shorting for nearly five years and I have found it to be incredibly complex and disturbingly it is widely practiced on Wall Street. My earlier blogs were intended to build a foundation needed to understand future blogs.

I am moving on in this blog to describe how illegal naked shorting is done and why securities laws and regulations have been almost totally unable to stop it. In this and upcoming blogs, I will be trying to interpret complex legal issues and it is necessary to issue a few precautionary warnings:

The securities laws are very complex and obviously I am not a trained lawyer. The SEC and the financial industry hire legions of lawyers to write and interpret these laws. As a layman with no training in the law, there is much that I do not know or understand.

The hedge funds and market makers who engage in widespread illegal naked shorting have been perpetrating this scheme for nearly three decades and have honed their skills to the point that they make Swiss cheese out of laws on illegal naked shorting by sculpting incredibly sophisticated strategies to avoid detection.

The data that is needed to determine the extent of illegal naked shorting is held in non-transparent, proprietary data bases lodged with the Prime Brokers and DTCC (owned by Prime Brokers) who tightly guard and block access to this data.

The illegal trades are done in a Wall Street that is now dominated by high frequency and algorithmic directed computer trading and is conducted often in dark pools in which trades are not reported publicly. Much illegality can be and is conducted in this shady environment. We outsiders can have no idea as to what is going on, nor apparently does the SEC.

PART 5

Part 6 Illegal Naked Shorting: The SEC’s Regulation SHO is Intended to Prevent Illegal Naked Shorting, But is Ineffective


In previous blogs I traced the history of stock trading from the 1960s when stock certificates and cash were physically exchanged to settle trades to the paper free, totally electronic system that exists today. Instead of owning stock certificates, we now own digital entries located somewhere in the vaults of the inscrutable Depository Trust and Clearing Corporation (DTCC). This electronic system is absolutely critical to the functioning of our capital markets and our strong economic system. However, the DTCC and the prime brokers who own it have made the clearing and settlement system virtually non-transparent. This enables the routine manipulation of primarily but not exclusively, small stocks through illegal naked shorting.

The Securities and Exchange Corporation (SEC) is an independent federal government agency responsible for protecting investors, maintaining fair and orderly functioning of securities markets and facilitating capital formation. It enforces legislation that was first passed in 1938 to address short selling. There was no further legislation until 2005 when Regulation SHO was implemented specifically to address naked shorting issues that were a result of the move to the electronic clearing and settlement system. In my opinion, Reg SHO is riddled with loopholes that render it ineffective in protecting investors from stock manipulation schemes enabled by illegal naked shorting. Also, the SEC seems strangely unconcerned about controlling illegal naked shorting and stock manipulation that results.

This blog goes into some of the key rules of Reg SHO which are routinely circumvented by Prime Brokers, the DTCC (owned by Prime Brokers) and aggressive, short selling hedge funds who routinely execute stock manipulation schemes enabled by illegal naked shorting. Before reading this blog, you might want to review my five prior blogs on illegal naked shorting that provide important background information.

PART 6

Part 7: Illegal Naked Shorting: DTCC Continuous Net Settlement and Stock Borrowing Programs Have Loopholes That Facilitate Illegal Naked Shorting

Acronyms Used Frequently in This Report

DTCC: The Depository Trust & Clearing Corporation (DTCC) provides clearing and settlement services to the US financial markets that handle the exchange of nearly all securities and cash on behalf of buyers and sellers. It is also a central securities depository providing central custody of almost all US securities.

DTC: The Depository Trust Corporation is a subsidiary of the DTCC. It is the depository for almost all US securities and keeps records of transfers through electronic record-keeping of securities balances.

NSCC: The National Securities Clearing Corporation (NSCC) is a DTCC subsidiary that provides clearing and settlement for almost all securities transactions in the US two days after a transaction (T+2). It also guarantees completion of certain broker-to-broker securities transactions.

There is an integral relationship between the DTCC and hedge funds. The DTCC is owned by Prime Brokers; these are Goldman Sachs, Morgan Stanley, Merrell Lynch and other household name investment banks. Prime Brokers provide basic services to hedge funds that allow them to trade with multiple brokerage houses while maintaining a centralized master account at their prime broker containing cash and securities. The prime broker offers stock loan services, portfolio reporting, consolidated cash management and other services. Hedge fund support is a very meaningful percentage of the net income of Prime Brokers.

PART 7

Part 8: Illegal Naked Shorting Series: Who or What is Cede and What Role Does Cede Play in the Trading of Stocks?

You Really Don’t Own the Shares that Appear in Your Brokerage Account; They Belong to Cede

Most investors when they buy a publicly traded stock believe that they own a part of some company. They think that somewhere there is a stock certificate or some indication of ownership that has their name on it, but this is not the case. When you buy a “stock” you are actually purchasing a security that affords certain entitlement rights related to registered stock which actual owners hold. The registered shares of a private company are directly owned by shareholders. In contrast, the registered shares of nearly all publicly traded equities are owned by Cede & Co., which is the nominee of the Depository Trust Company (DTC). (A nominee is a company whose name is given as having title to a stock, but does not receive the financial benefits of ownership.) Cede is a subsidiary of the Depository Trust Company (DTC) which is a subsidiary of the Depository Trust and Clearing Corporation (DTCC) and the DTCC is a private company owned by elite Wall Street firms and money center banks. If you need background or a refresher on DTC and DTCC, click on this link. Effectively, elite Wall Street firms and money center banks, not institutions and individual investors, own almost all of the registered shares of publicly traded companies in the US.

The DTC is a depository that holds securities of publicly traded stocks in street name (not to be confused with registered stock) for some 600 broker-dealers and banks who have accounts with it. Bear with me, I will explain what street name securities are shortly, but be clear that they are not the registered securities held by Cede & Co. which never leave its vault. It is street name securities that are held in inventories of brokers and are traded from broker to broker in the public markets. These street name securities have contractual rights to the financial benefits of the registered shares owned by Cede and also convey voting rights on corporate governance matters.

Brokers in the aggregate hold inventories of street name securities located in accounts at the DTC. Investor accounts lodged with brokers are also held at the DTC. When we investors buy a stock through a broker it is noted as a digital entry in the DTC’s electronic bookkeeping system so that the broker becomes our nominee. The upshot is that almost all U.S. investors are beneficial rather than registered owners of a stock. This entitles us to receive financial benefits such as dividends and to vote on corporate governance issues. While you may think you are buying registered stock, you are actually buying a financial derivative related to that stock. Effectively, you are buying a financial derivative from brokers of a financial derivative they hold from Cede that is just a digital entry in your DTC account.

Cede is at the center of the current, paperless electronic trading system that enables lightning fast trading of large blocks of stock by institutional investors and computers. Unfortunately, the intention in designing it was to provide liquidity and reduce settlement risk. There is virtually no transparency in the system. Disturbingly, there are loopholes which allow for the counterfeiting of shares by market makers on a massive scale through illegal naked shorting and other measures. At present, there is no way for an outsider or even the securities industry’s regulator, the SEC, to meaningfully detect and track these counterfeit shares. Once created counterfeit shares go on to be treated the same as legitimate street name shares. I discussed how this is done in series 7 of my illegal naked shorting series.

PART 8

Part 9 of Illegal Naked Shorting Series: The Risk/ Reward of Shorting Versus Buying Stocks is Extremely Unfavorable

Investment Overview

Selling something you don’t own seems a pretty alien concept to me. I struggle to find any business models for which this is a key strategy. The exception is shorting of stocks and other securities which is a huge business on Wall Street that is carried on by many hedge funds and aided and supported by household name investment banks who execute trades and through prime brokerage services provide extensive logistical and financial support to hedge funds. And in point of fact, most of the household name investment banks operate huge hedge funds internally which they euphemistically refer to as proprietary trading.

In this report, I contrast the risk and reward of shorting versus buying stocks. When you unravel the economics and risk/ reward of shorting, it is clear to me that this is a highly risky, low return strategy. As argued in this report, I see shorting as a losers game if employed consistently over time as opposed to buying stocks which is a winners game. I see shorting as a niche strategy that is applicable on a short term trading basis for a very limited number of stock trades. I think you will agree with me as I go through the major risk and reward elements of shorting.

Why then is this such a big business? I think that it is because the perpetrators have evolved a widely employed strategy that uses shorting and illegal naked shorting to actually control prices of many stocks, moving them down in a predictable way. This converts short selling of stocks into a predictable business with extremely high returns and low risk. In prior blogs, I have laid out the role of the Depository Trust and Clearing Corporation which is responsible for clearing and settlement of essentially all stock trades in the US and is also the depository for all traded shares. DTCC is a private company owned by the same Prime Brokers who are so prominent in shorting. My prior blogs have shown how the DTCC allows the creation of counterfeit shares through illegal naked shorting. In essence then, the Prime Brokers are the key players and referees in the short selling business.

PART 9


imo and as i've noted for years now .. the last aspect NR (non retail) wants is an educated retail investor
or an aware (targeted) management .. nor imo can the SEC allow for total true RT (real time) transparency
without imploding U.S. Equities in total .. not too difficult to see the appeal of Tzero


10/5/07 -- there are no coincidences here ...
oh and like many other longs .. not selling at this level --

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