Thursday, February 29, 2024 6:51:33 PM
https://www.sec.gov/comments/s7-29-22/s72922-20153799-321641.pdf
QUICK JUMP TO PAGE 5 TO GET RIGHT TO THE POINT:
The Creation of Counterfeit Shares – There are a variety of names that the securities industry
has dreamed up that are euphemisms for counterfeit shares. Don’t be fooled: Unless the short
seller has actually borrowed a real share from the account of a long investor, the short sale is
counterfeit. It doesn’t matter what you call it and it may become non-counterfeit if a share is later
borrowed, but until then, there are more shares in the system than the company has sold.
The magnitude of the counterfeiting is hundreds of millions of shares every day, and it may
be in the billions. The real answer is locked within the prime brokers and the DTC. Incidentally,
counterfeiting of securities is as illegal as counterfeiting currency, but because it is all done
electronically, has other identifiers and industry rules and practices, i.e. naked shorts, fails-to-
deliver, SHO exempt, etc. the industry and the regulators pretend it isn’t counterfeiting. Also,
because of the regulations that govern the securities, certain counterfeiting falls within the letter
of the rules. The rules, by design, are fraught with loopholes and decidedly short on allowing
companies and investors access to information about manipulations of their stock.
The creation of counterfeit shares falls into three general categories. Each category has a
plethora of devices that are used to create counterfeit shares.
1. Fails-to-Deliver – If a short seller cannot borrow a share and deliver that share to the
person who purchased the (short) share within the three days allowed for settlement of
the trade, it becomes a fail-to-deliver and hence a counterfeit share; however the share is
transacted by the exchanges and the DTC as if it were real. Regulation SHO,
implemented in January 2005 by the SEC, was supposed to end wholesale fails-to-
deliver, but all it really did was cause the industry to exploit other loopholes, of which
there are plenty (see 2 and 3 below).
Since forced buy-ins rarely occur, the other consequences of having a fail-to-deliver
are inconsequential, so it is frequently ignored. Enough fails-to-deliver in a given stock
will get that stock on the SHO list, (the SEC’s list of stocks that have excessive fails-to-
deliver) - which should (but rarely does) see increased enforcement. Penalties amount to
a slap on the wrist, so large fails-to-deliver positions for victim companies have remained
for months and years.
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