Innovation Pharmaceuticals Inc (IPIX)

[Justfactsmam]

Sunspotter... you state Naked Shorting ... DOES NOT EXIST...outside of Conspiracy Therorist!~

If this naked short nonsense were actually true, it would make zero sense to buy any stock which was subject to it.

Fortunately it doesn’t exist outside the fevered imaginations of a few conspiracy theorists.

THE SEC ... says YOU ARE WRONG! See ENFORCEMENT ACTION BY SEC AGAINST NAKED SHORTS...

Yes there are Conspiracy Therorist...and they deny Illegal Naked Short Selling.



Examples of SOME Naked Short Selling Proscesucitons by SEC.


IV. SEC ENFORCEMENT ACTIONS INVOLVING
“NAKED” SHORT SELLING
Although the SEC has brought only a handful of actions relating to short attacks (and has brought those cases only where it has been able to allege unambiguous claims of fraud or manipulation), the agency has continued to state that
271. On March 30, 2010, Medifast restated previously announced earnings for 2006, 2007, and
2008 due to an error in accounting for certain tax liabilities, which reduced net income in those
years. Medifast, Inc., Annual Report (Form 10-K), at 22 (Mar. 30, 2010). Medifast also delayed reporting its financial results for fiscal 2010, and subsequently announced the restatement of previously announced earnings for 2008 and 2009, “principally due to errors in recording certain ordinary course of
business expenses in the proper period,” but also due to a write-off related to an intangible asset and the
failure to record properly certain up-front customer payments over applicable service periods, which
reduced net income in those years. Medifast, Inc., Annual Report (Form 10-K), at 29 (Apr. 1, 2011).
272. Medifast, Inc., Current Report (Form 8-K), at 2 (Apr. 16, 2010).
273. Medifast, Inc., Current Report (Form 8-K), at 2 (May 18, 2010); Medifast, Inc., Current
Report (Form 8-K), Item 5.02(b) (Nov. 14, 2012); Medifast, Inc., Current Report (Form 8-K),
Item 5.02(b) (Dec. 26, 2012); Medifast, Inc., Current Report (Form 8-K), Item 5.02(b) ( Jan. 7, 2013).
274. See Medifast, Inc., Quarterly Report (Form 10-Q), at 18 (Nov. 9, 2009) (“There are currently
no pending matters of a material nature related to any government investigation of the case involving
Mr. Minkow, his company, its affiliates or associates. Any actions related to any government investigation pertaining to this complaint have been deemed confidential at this time.”). On September 10,
2012, the FTC announced a $3.7 million settlement with a Medifast subsidiary for allegedly violating
a previous FTC settlement by making unsupported claims about Medifast’s weight-loss program. Press
Release, Fed. Trade Comm’n, Subsidiary of Diet Plan Marketer Medifast Inc. to Pay $3.7 Million to Settle FTC Charges (Sept. 10, 2012), available at http://www.ftc.gov/opa/2012/09/jasonpharm.shtm.
275. Maxwell Murphy, SEC Probe into Barry Minkow’s Fraud Discovery Institute Continues, DOW
JONES NEWSWIRE ( June 11, 2011), http://www.advfn.com/nyse/StockNews.asp?stocknews=IOC&article=
43201457.
SEC Enforcement Actions and Issuer Litigation 731
abusive short selling is an enforcement priority.276 In this regard, a series of enforcement actions against “naked” short sellers and related persons for technical
violations of Regulation SHO—including several actions against options marketmakers—suggests that, even in the absence of proof that market participants
have engaged in blatantly abusive or manipulative conduct that is characteristic
of short attacks, the SEC will prosecute violations of Regulation SHO. Notably,
several recent cases involve alleged “naked” short selling of stock in companies
that have asserted they were victims of short attacks. With these cases, it is apparent that the SEC has chosen to use the technical requirements of Regulation
SHO as a significant tool for policing potentially abusive short selling.
The SEC has brought a number of enforcement actions related to what are
termed “reverse conversion” and sham “reset” transactions. Such transactions
are designed to evade the locate and close-out requirements of Regulation
SHO, resulting in “naked” short sales.277 For example, the SEC brought an ad276. See Press Release, U.S. Sec. & Exch. Comm’n, SEC Charges optionsXpress and Five Individuals Involved in Abusive Naked Short Selling Scheme (Apr. 16, 2012) (No. 2012-66), available at
http://www.sec.gov/news/press/2012/2012-66.htm (quoting statement by Daniel M. Hawke, Chief
of the SEC Enforcement Division’s Market Abuse Unit, that compliance with Regulation SHO “continues to be a high enforcement priority”).
277. The Commission has explained that a:
“reverse conversion” or “reversal,” involves selling stock short while also selling a put option and
buying a call option that each have the exact same expiration date and strike price. The option
combination creates what is known as a ‘synthetic long position’ that hedges the short stock sale.
All three of these transactions are executed with the same counterparty—which is engaging in a
“conversion.” The position is “delta neutral” to any change in the underlying stock price because
whether the equity price rises or falls, the position remains hedged until the options expire,
when one option will expire worthless while the other will be exercised or assigned, causing
the stock to be received by the original seller and closing the short position.
Jeffrey A. Wolfson, Exchange Act Release No. 66283, 2012 WL 1024032, at *3 ( Jan. 31, 2012). The
Commission has further explained that a “reset” is a “sham transaction” that purports to discharge a
short seller’s obligation to “purchase” the shorted security and “close out” its short position. Id. at *4.
To accomplish a sham reset, the short seller purchases a long position in the shorted stock and simultaneously purchases “from the same counterparty a short-term, deep in-the-money put option
(a so-called ‘married put,’ because the purchase of stock was paired with the put option),” or sells
“a short-term, deep in-the-money call option (a so-called ‘buy write’ because the buyer buys shares
and ‘writes’—or sells—a call option). This ostensible purchase of shares married with the short-term
deep in-the-money option create[s] the illusion that the [short seller has] satisfied the close-out obligation of Reg. SHO Rule 203(b)(3) by ‘purchasing’ shares. But because the purchase was married to
a short-term deep in-the-money option that in fact negated the purchase and returned the shares to
the counterparty the next day, it was not a bona-fide purchase transaction.” Id. (footnote omitted).
Some observers have suggested that these types of transactions may have been used in connection
with abusive short selling schemes to create fictional shares for the purpose of “covering” what
were in reality naked short sales. See Weiss, supra note 233 (stating that allegations made by Overstock in a brief filed in California state court, when read in conjunction with subsequent SEC enforcement actions against certain options market makers, suggest that prime brokers may have acquired
inventory to cover customers’ short sales from options traders who created fictional shares through
reverse conversions). The SEC’s Division of Market Regulation has stated unambiguously that
“[n]aked short selling has no effect on an issuer’s total shares outstanding.” Responses to Frequently
Asked Questions Concerning Regulation SHO, Question 7.1, U.S. SEC.&EXCH. COMM’N (Apr. 10,
2012), http://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm (refuting the belief, held by
some, “that naked short sale transactions cause the number of shares trading to exceed the number
of shares outstanding, which in turn allows broker-dealers to trade shares that don’t exist”).
732 The Business Lawyer; Vol. 68, May 2013
ministrative enforcement proceeding in 2012 against optionsXpress, an online
broker-dealer and clearing agency specializing in options and futures that is currently a wholly owned subsidiary of The Charles Schwab Corporation; Thomas
E. Stern, an optionsXpress executive; and Jonathan I. Feldman, a retail customer
of optionsXpress.278 The SEC alleged that optionsXpress failed to satisfy its
close-out obligations under Rules 204 and 204T of Regulation SHO by repeatedly engaging in sham reset transactions that facilitated “naked” short selling
by customers, including Feldman.279 The SEC claimed that the respondents
knew, or were reckless in not knowing, that the options would be exercised
and assigned on the day that they were sold, resulting in shares not being delivered on settlement.280 After a hearing, an SEC Administrative Law Judge (“ALJ”)
rendered an initial decision finding that optionsXpress willfully violated Rules
204 and 204T of Regulation SHO by executing sham buy-write transactions,
which involved the purchase of shares of a stock and the simultaneous sale of
a call option for the same amount of shares—for the purpose of covering
FTDs—and further finding that Feldman’s sale of deep-in-the-money calls resulting in naked short positions that were covered through buy-writes constituted fraud in violation of section 17(a) of the Securities Act, section 10(b) of
the Exchange Act, and Rules 10b-5 and 10b-21 thereunder.281
In a related, settled administrative proceeding, an optionsXpress trader and
two optionsXpress compliance officials consented to the entry of an order finding that they caused optionsXpress’s violations of Rules 204 and 204T of Regulation SHO and ordering them to cease and desist.282 The three settling respondents also agreed to cooperate with the SEC in any related investigations,
litigation, and other proceedings.283
While the SEC did not allege the spreading of false rumors or other such conduct, it did assert that:
Rule 10b-21 and Rules 204 and 204T were adopted, among other things, to address
abusive “naked” short selling and failures to deliver. . . .
. . . Sellers sometimes intentionally fail to deliver securities as part of a scheme to
manipulate the price of a security, or possibly to avoid borrowing costs associated
with short sales . . . . Failures to deliver . . . can negatively affect purchasers of
stock by depriving them of the benefits of ownership, such as voting and lending,
and create a misleading impression of the market for an issuer’s stock.284
278. optionsXpress, Inc., Securities Act Release No. 9313, 2012 WL 1264508 (Apr. 16, 2012).
279. Id. at *1.
280. Id. at *5.
281. optionsXpress, Inc., Initial Decision Release No. 490, 2013 WL 2471113, at *4, *62–78
( June 7, 2013). The ALJ also found that Stern willfully caused and aided and abetted the violations
of optionsXpress and Feldman, and that optionsXpress willfully caused and aided and abetted Feldman’s violations, ordered disgorgement of ill-gotten gains, and imposed monetary and other sanctions on the respondents. Id. at *79–88.
282. Peter J. Bottini, Exchange Act Release No. 66814, 2012 WL 1264509 (Apr. 16, 2012).
283. Id. at *9.
284. optionsXpress, Inc., 2012 WL 1264508, at *4.
SEC Enforcement Actions and Issuer Litigation 733
The SEC also claimed that the “sham reset transactions” at issue in the optionsXpress matter “impacted the market for the issuers,” accounting, for example, for
“47.9% of the daily trading volume in Sears” stock between January 1, 2010, and
January 31, 2010.285 According to the SEC, Feldman was aware that his trading
had an effect on the marketplace, and his “use of buy-writes was a manipulative
device and deceived the market.”286
Similarly, in an administrative proceeding against brothers Jeffrey A. Wolfson
and Robert A. Wolfson and Golden Anchor Trading II, LLC (“Golden Anchor”),
Robert Wolfson’s trading vehicle, the SEC alleged that the respondents routinely
used “sham” reverse conversion and reset transactions “to circumvent Reg. SHO,
allow[ing] them to generate millions of dollars in profits . . . and caus[ing] their
clearing broker to have large persistent fail to deliver positions in . . . threshold
securities, thus undermining an important purpose of Reg. SHO.”287 The SEC’s
order instituting proceedings against the Wolfsons cited Regulation SHO’s proposing rule release, which explained that “naked short sellers enjoy greater leverage . . . and they may use this additional leverage to engage in trading activities
that deliberately depress the price of a security.”288
The SEC asserted violations of Rules 203(b)(1) and 203(b)(3) under Regulation SHO. Threshold securities in which the Wolfsons allegedly traded include
Fairfax and Novastar Financial, Inc. (“Novastar”), both companies that have allegedly been victims of short attacks or naked short selling.289 Consent orders
were entered against the Wolfson respondents.290
In August 2009, the SEC brought a settled enforcement action against brokerdealer Hazan Capital Management, LLC (“HCM”), an options market-maker, and
285. Id. at *2.
286. Id. at *20.
287. Jeffrey A. Wolfson, Exchange Act Release No. 66283, 2012 WL 1024032 ( Jan. 31, 2012).
288. Id. at *1–2.
289. See id. at *5. Fairfax is discussed in Part III.B. In June 2006, a group of Novastar investors
brought a lawsuit in California state court against a number of major prime brokerage firms for allegedly manipulating the market for Novastar stock by executing short sales and intentionally failing
to deliver stock to settle those positions. See Second Amended Complaint, Avenius v. Banc of Am.
Sec. LLC, No. CGC-06-453422 (Cal. Super. Ct. May 29, 2008). A number of the defendants reached
undisclosed settlements with the plaintiffs in May 2011. See Avenius v. Banc of Am. Sec. LLC, No.
CGC-06-453422, slip op. at 2 (Cal. Super. Ct. May 26, 2011) (order granting certain defendants’ motions for summary judgment). On May 26, 2011, upon finding that the plaintiffs failed to raise any
competent, affirmative evidence that the defendants engaged in market manipulation, the court
granted summary judgment in favor of the remaining defendants. Id. at 5–6. The Novastar lawsuit
is similar to a lawsuit against prime brokerage firms initiated by Overstock in February 2007,
which is discussed in Part III.B.
290. J. Wolfson consented to the entry of an administrative order requiring him to cease and desist
from violating Exchange Act Rules 203(b)(1) and 203(b)(3), suspending him from association with
certain regulated entities, and ordering him to pay disgorgement of $8,771,432, prejudgment interest
of $2,153,568, and civil penalties of $2,500,000. Jeffrey A. Wolfson, Exchange Act Release No.
67451, 2012 WL 2914903, at *12–13 ( July 17, 2012). R. Wolfson and Golden Anchor also consented to the entry of an administrative order requiring them to cease and desist from violating Exchange Act Rules 203(b)(1) and 203(b)(3), suspending R. Wolfson from association with certain regulated entities, and requiring R. Wolfson and Golden Anchor to pay, on a joint and several basis,
disgorgement of $722,589, prejudgment interest of $177,411, and civil penalties of $200,000. Jeffrey
A. Wolfson, Exchange Act Release No. 67450, 2012 WL 2914902, at *11 ( July 17, 2012).
734 The Business Lawyer; Vol. 68, May 2013
its owner, Steven M. Hazan, for violations of Regulation SHO based on the
broker-dealer’s involvement in reverse conversion and reset transactions.291 The
SEC found, and the respondents neither admitted nor denied, that the respondents used reverse conversions and reset transactions to circumvent Regulation
SHO.292 The SEC further found, and the respondents neither admitted nor denied, that, at the time of the short sales at issue, the respondents improperly
claimed the market-maker exception to the locate requirement, although the respondents were not engaged in bona fide market making.293
On the same day it brought its enforcement action against HCM, the SEC
brought another settled action, based on substantially similar conduct, against
TJM Proprietary Trading, LLC (“TJM”), a broker-dealer and options marketmaker; John T. Burke, its principal and chief operating officer; and Michael R.
Benson, a TJM trader.294 The SEC settlement alleged that TJM committed, and
its trader willfully aided and abetted and caused, violations of Regulation SHO
Rules 203(b)(1) and 203(b)(3) based on TJM’s participation in reverse conversion and sham reset transactions.295 The SEC settlement alleged that Burke failed
to supervise Benson reasonably, in violation of section 15(b)(4)(E) of the Exchange Act.296
Three months after it settled the TJM and HCM actions, the SEC brought yet
another settled enforcement action against several entities relating to similar
transactions that it alleged were violative of Regulation SHO.297 According to
the SEC, Fat Squirrel Trading Group, LLC (“FSTG”) and Rhino Trading, LLC
291. Hazan Capital Mgmt., LLC, Exchange Act Release No. 60441, 96 SEC Docket 1627 (Aug. 5,
2009), 2009 WL 2392842.
292. Id. at *1–2. While the enforcement order does not specifically identify HCM’s counterparties
or the threshold securities at issue, filings in Overstock.com’s market manipulation case against a
number of brokers, discussed in Part III.B, name Hazan as one of the market-makers engaged in
naked short selling of Overstock.com securities during the relevant time period. See, e.g., Plaintiff ’s
Consolidated Opposition to Defendant’s Motions to Seal Summary Judgment Papers, Overstock.com,
Inc. v. Morgan Stanley & Co., No. CGC-07-460147 (Cal. Super. Ct. Mar. 1, 2012).
293. In settling the enforcement action, Hazan and HCM agreed to cease and desist from causing
or committing violations of Rules 203(b)(1) and 203(b)(3). Hazan also agreed to a five-year bar from
association with any broker or dealer, and HCM consented to a censure. Hazan Capital Mgmt., LLC,
2009 WL 2392842, at *7. Hazan and HCM also jointly and severally paid $1,000,000 in fines and
$3,000,000 in disgorgement to NYSE Amex and NYSE Arca pursuant to a Stipulation of Facts and
Consent to Penalty that Hazan and HCM entered into with those entities based on the same conduct.
See NYSE Amex LLC Hearing Board Decisions 09-AMEX-21, 09-AMEX-22 (Aug. 4, 2009), http://
www.nyse.com/pdfs/09-AMEX-21-22%2009-ARCA-05-06.pdf; NYSE Arca, Inc. Hearing Board Decisions 09-ARCA-5, 09-ARCA-6 (Aug. 4, 2009), http://www.nyse.com/pdfs/09-AMEX-21-22%2009-
ARCA-05-06.pdf.
294. TJM Proprietary Trading, LLC, Exchange Act Release No. 60440, 96 SEC Docket 1622
(Aug. 5, 2009), 2009 WL 2392840.
295. Id. at *2.
296. Id. In settling the allegations, TJM, Benson, and Burke jointly and severally paid a $250,000
fine, and TJM paid $541,000 in disgorgement. TJM and Benson also agreed to cease and desist from
committing or causing violations of Rules 203(b)(1) and 203(b)(3), and TJM was censured. Benson
agreed to be suspended from associating with any broker or dealer for three months, and Burke
agreed to be suspended from associating with any broker or dealer in a supervisory capacity for
nine months. Id. at *6–7.
297. Rhino Trading, LLC, Exchange Act Release No. 60941, 97 SEC Docket 234 (Nov. 4, 2009),
2009 WL 3652431.
SEC Enforcement Actions and Issuer Litigation 735
(“Rhino”), both registered broker-dealers and options market-makers, violated
Rule 203(b)(3) by engaging in “a large volume” of reverse conversion and
sham reset transactions like those effected by TJM and HCM and intended to circumvent their locate and close-out obligations in Regulation SHO threshold securities. The securities at issue included the stock of Novastar and USANA—
both of which claimed to be victims of short attacks or naked short selling.298
As a result, the SEC alleged that Rhino and FSTG violated Rule 203(b)(3) of Regulation SHO.299
The SEC brought additional enforcement actions against traders based on
reverse conversions and sham resets in late 2011 and early 2012. In a settled
action, the SEC alleged that Gary Bell and GAS I, LLC (“GAS”), both registered
broker-dealers, violated Rules 203(b)(1) and 203(b)(3) of Regulation SHO by
engaging in “a large number” of reverse conversion and sham reset transactions,
including transactions in the stock of Novastar.300 In order to settle the allegations, Bell agreed to cease and desist from committing or causing any violations
of Rules 203(b)(1) and 203(b)(3), agreed to a nine-month suspension, and
paid disgorgement and interest of $1,836,094 and a civil money penalty of
$250,000.301
The SEC has also filed enforcement actions against broker-dealers for allegedly
assisting customers in effecting naked short sale transactions. For example, the
SEC brought a settled enforcement action against UBS Securities, LLC (“UBS”),
a registered broker-dealer and investment advisor, for alleged violations of section 17(a) of the Exchange Act and Rule 203(b) of Regulation SHO.302 In that
settlement, the SEC alleged that UBS traders provided and recorded “locates”
for their customers in order to enable them to execute short sales, despite in
many instances not having contacted a lender to confirm the availability of the
shares that they purported to borrow or agreed to borrow.303 The SEC alleged
that, by permitting this practice, UBS created a system in which it was not possible to trace the basis upon which a locate was actually granted, and that the
basis was in many cases documented inaccurately.304 The SEC settlement alleged
that UBS violated the recordkeeping requirements of section 17(a) of the Exchange Act and the Rule 203(b) requirement that a broker-dealer borrow, arrange to borrow, or have reasonable grounds to believe that an equity security
298. USANA is discussed in Part III.C. Novastar is discussed at supra note 289.
299. The SEC settlement also included allegations that Steven Peter, an FSTG trader and managing
member, and Damon Rein, a trader at both FSTG and Rhino, willfully aided and abetted and caused
those violations. In settling the allegations, Rhino and Rein agreed jointly and severally to pay a fine of
$150,000 and FSTG, Rein and Peter agreed jointly and severally to pay a $30,000 fine. In addition,
Rhino and FSTG agreed to pay $350,000 and $45,000, respectively, in disgorgement, and Rein
and Peter agreed to three-month suspensions. Each of the defendants agreed to cease and desist
from committing or causing violations of Rule 203(b)(3), and Rhino and FSTG were censured.
Id. at *5–6.
300. See Gary S. Bell, Exchange Act Release No. 65941, 2011 WL 6184476, at *6 (Dec. 13, 2011).
301. Id. at *7.
302. UBS Sec. LLC, Exchange Act Release No. 65733, 2011 WL 5444407 (Nov. 10, 2011).
303. Id. at *3–4.
304. Id. at *4.
736 The Business Lawyer; Vol. 68, May 2013
can be borrowed before accepting a short sale order in the equity security or
effecting a short sale in the security for its own account.305
Broker-dealer Goldman Sachs Execution & Clearing, L.P. (“Goldman”) consented to the entry of an administrative order finding that it violated section
10(a) of the Exchange Act and caused customers to engage in naked short selling.306 According to the SEC, Goldman relied on certain customers’ representations that they held “long” positions in securities that they were selling, even
though, for more than two years, Goldman knew that these customers had repeatedly failed to deliver securities that they had sold, and that they were purchasing stock in other offerings to cover these sales.307 The SEC’s order found
that Goldman’s records contained information showing that Goldman was improperly lending these customers securities to accomplish this.308 The SEC
found that Goldman could have discovered this information if it had appropriate
procedures in place.309
These enforcement actions indicate that the SEC will continue to pursue regulatory cases against short sellers and related parties. Although recent enforcement activity may presage more aggressive SEC action against naked short sellers
and those who facilitate naked short sales, there is no indication from these cases
that the SEC intends to pursue short attack actions in the absence of clear evidence of scienter and of false rumors being used to depress the price of shorted
securities.
V. CONCLUSION
Difficulties of proof are endemic to short attack cases. An issuer that believes it
is facing a short attack has to evaluate these difficulties and their implications
closely in deciding what strategies to employ in responding to a perceived attack.
The SEC enforcement actions in this area show that the Commission is not likely
to pursue fraud charges against a short seller or its affiliates in an alleged short
attack case absent egregious conduct and persuasive evidence. This position is
305. Id. at *1–2. In settling the allegations, UBS agreed to retain and cooperate with an independent con