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PNKBULLSHT · 2008-07-27T13:13:55.5630000Z

"CELLAR BOXING" IS THIS WHAT YOU WANTED????????................ IR Back OfficeRecent IR-IA WorkIPO's Log InConfidential AgreementCareerIPO Back OfficeIR Log InBack Office AdminLibrary Naked Short Selling There’s a form of the securities fraud known as naked short selling that is becoming very popular and lucrative to the market makers that practice it. It is known as “Cellar boxing” and it has to do with the fact that the NASD and the SEC had to arbitrarily set a minimum level at which a stock can trade. This level was set at $.0001 or one-one hundredth of a penny. This level is appropriately referred to as “the cellar”. This $.0001 level can be used as a "backstop" for all kinds of market maker and naked short selling manipulations. “Cellar boxing” has been one of the security frauds du jour since 1999 when the market went to a “decimalization” basis. In the pre-decimalization days the minimum market spread for most stocks was set at 1/8th of a dollar and the market makers were guaranteed a healthy “spread”. Since decimalization came into effect, those one-eighth of a dollar spreads now are often only a penny as you can see in Microsoft’s quote throughout the day. Where did the unscrupulous MMs go to make up for all of this lost income? They headed "south" to the OTCBB and Pink Sheets where the protective effects from naked short selling like Rule 10-a, and NASD Rules 3350, 3360, and 3370 are nonexistent. The unique aspect of needing an arbitrary “cellar” level is that the lowest possible incremental gain above this cellar level represents a 100% spread available to MMs making a market in these securities. When compared to the typical spread in Microsoft of perhaps four-tenths of 1%, this is pretty tempting territory. In fact, when the market is no bid to $.0001 offer there is theoretically an infinite spread. In order to participate in “cellar boxing”, the MMs first need to pummel the price per share down to these levels. The lower they can force the share price, the larger are the percentage spreads to feed off of. This is easily done via garden variety naked short selling. In fact if the MM is large enough and has enough visibility of buy and sell orders as well as order flow, he can simultaneously be acting as the conduit for the sale of nonexistent shares through Canadian co-conspiring broker/dealers and their associates with his right hand at the same time that his left hand is naked short selling into every buy order that appears through its own proprietary accounts. The key here is to be a dominant enough of a MM to have visibility of these buy orders. This is referred to as "broker/dealer internalization" or naked short selling via "desking" which refers to the market makers trading desk. While the right hand is busy flooding the victim company's market with "counterfeit" shares that can be sold at any instant in time the left hand is nullifying any upward pressure in share price by neutralizing the demand for the securities. The net effect becomes no demonstrable demand for shares and a huge oversupply of shares which induces a downward spiral in share price. In fact, until the "beefed up" version of Rule 3370 (Affirmative determination in writing of "borrowability" by settlement date) becomes effective, U.S. MMs have been "legally" processing naked short sale orders out of Canada and other offshore locations even though they and the clearing firms involved knew by history that these shares were in no way going to be delivered. The question that then begs to be asked is how "the system" can allow these obviously bogus sell orders to clear and settle. To find the answer to this one need look no further than to Addendum "C" to the Rules and Regulations of the NSCC subdivision of the DTCC. This gaping loophole allows the DTCC, which is basically the 11,000 b/ds and banks that we refer to as "Wall Street”, to borrow shares from those investors naive enough to hold these shares in "street name" at their brokerage firm. This amounts to about 95% of us. Theoretically, this “borrow” was designed to allow trades to clear and settle that involved LEGITIMATE 1 OR 2 DAY delays in delivery. This "borrow" is done unbeknownst to the investor that purchased the shares in question and amounts to probably the largest "conflict of interest" known to mankind. The question becomes would these investors knowingly loan, without compensation, their shares to those whose intent is to bankrupt their investment if they knew that the loan process was the key mechanism needed for the naked short sellers to effect their goal? Another question that arises is should the investor's b/d who just earned a commission and therefore owes its client a fiduciary duty of care, be acting as the intermediary in this loan process keeping in mind that this b/d is being paid the cash value of the shares being loaned as a means of collateralizing the loan, all unbeknownst to his client the purchaser. An interesting phenomenon occurs at these "cellar" levels. Since NASD Rule 3370 allows MMs to legally naked short sell into markets characterized by a plethora of buy orders at a time when few sell orders are in existence, a MM can theoretically "legally" sit at the $.0001 level and sell nonexistent shares all day long because at no bid and $.0001 ask there is obviously a huge disparity between buy orders and sell orders. What tends to happen is that every time the share price tries to get off of the cellar floor and onto the first step of the stairway at $.0001 there is somebody there to step on the hands of the victim corporation's market. Once a given micro cap corporation is “boxed in the cellar” it doesn’t have a whole lot of options to climb its way out of the cellar. One obvious option would be for it to reverse split its way out of the cellar but history has shown that these are counter-productive as the market capitalization typically gets hammered and the post split share price level starts heading back to its original pre-split level. Another option would be to organize a sustained buying effort and muscle your way out of the cellar but typically there will, as if by magic, be a naked short sell order there to meet each and every buy order. Sometimes the shareholder base can muster up enough buying pressure to put the market at $.0001 bid and $.0002 offer for a limited amount of time. Later the market makers will typically pound the $.0001 bids with a blitzkrieg of selling to wipe out all of the bids and the market goes back to no bid and $.0001 offer. When the weak-kneed shareholders see this a few times they usually make up their mind to sell their shares the next time that a $.0001 bid appears and to get the heck out of Dodge. This phenomenon is referred to as “shaking the tree” for weak-kneed investors and it is very effective. At times the market will go to $.0001 bid and $.0003 offer. This sets up a juicy 200% spread for the MMs and tends to dissuade any buyers from reaching up to the "lofty" level of $.0003. If a $.0002 bid should appear from a MM not "playing ball" with the unscrupulous MMs, it will be hit so quickly that Level 2 will never reveal the existence of the bid. The $.0001 bid at $.0003 offer market sets up a "stalemate" wherein market makers can leisurely enjoy the huge spreads while the victim company slowly dilutes itself to death by paying the monthly bills with "real" shares sold at incredibly low levels. Since all of these development-stage corporations have to pay their monthly bills, time becomes on the side of the naked short sellers. At times it almost seems that the unscrupulous market makers are not actively trying to kill the victim corporation but instead want to milk the situation for as long of a period of time as possible and let the corporation die a slow death by dilution. The reality is that it is extremely easy to strip away 99% of a victim company’s share price or market cap and to keep the victim corporation “boxed“ in the cellar, but it really is difficult to kill a corporation especially after management and the shareholder base have figured out the game that is being played at their expense. As the weeks and months go by the market makers make a fortune with these huge percentage spreads but the net aggregate naked short positions become astronomical from all of this activity. This leads to some apprehension amongst the co-conspiring MMs. The predicament they find themselves in is that they can’t even stop naked short selling into every buy order that appears because if they do the share price will gap and this will put tremendous pressures on net capital reserves for the MMs and margin maintenance requirements for the co-conspiring hedge funds and others operating out of the more than 13,000 naked short selling margin accounts set up in Canada. And of course covering the naked short position is out of the question since they can’t even stop the day-to-day naked short selling in the first place and you can't be covering at the same time you continue to naked short sell. What typically happens in these situations is that the victim company has to massively dilute its share structure from the constant paying of the monthly burn rate with money received from the selling of “real” shares at artificially low levels. Then the goal of the naked short sellers is to point out to the investors, usually via paid “Internet bashers”, that with the, let’s say, 50 billion shares currently issued and outstanding, that this lousy company is not worth the $5 million market cap it is trading at, especially if it is just a shell company whose primary business plan was wiped out by the naked short sellers’ tortuous interference earlier on. The truth of the matter is that the single biggest asset of these victim companies often becomes the astronomically large aggregate naked short position that has accumulated throughout the initial “bear raid” and also during the “cellar boxing” phase. The goal of the victim company now becomes to avoid the 3 main goals of the naked short sellers, namely: bankruptcy, a reverse split, or the forced signing of a death spiral convertible debenture out of desperation. As long as the victim company can continue to pay the monthly burn rate, then the game plan becomes to make some of the strategic moves that hundreds of victim companies have been forced into doing which includes name changes, CUSIP # changes, cancel/reissue procedures, dividend distributions, amending of by-laws and Articles of Corporation, etc. Nevada domiciled companies usually cancel all of their shares in the system, both real and fake, and force shareholders and their b/ds to PROVE the ownership of the old “real” shares before they get a new “real” share. Many also file their civil suits at this time also. This indirect forcing of hundreds of U.S. micro cap corporations to go through all of these extraneous hoops and hurdles as a means to survive, whether it be due to regulatory apathy or lack of resources, is probably one of the biggest black eyes the U.S. financial systems have ever sustained. In a perfect world it would be the regulators that periodically audit the “C” and “D” sub-accounts at the DTCC, the proprietary accounts of the MMs, clearing firms, and Canadian b/ds, and force the buy-in of counterfeit shares, many of which are hiding behind altered CUSIP #s, that are detected above the Rule 11830 guidelines for allowable “failed deliveries” of one half of 1% of the shares issued. U.S. micro cap corporations should not have to periodically “purge” their share structure of counterfeit electronic book entries but if the regulators will not do it then management has a fiduciary duty to do it. A lot of management teams become overwhelmed with grief and guilt in regards to the huge increase in the number of shares issued and outstanding that have accumulated during their “watch”. The truth however is that as long as management made the proper corporate governance moves throughout this ordeal then a huge number of resultant shares issued and outstanding is unavoidable and often indicative of an astronomically high naked short position and is nothing to be ashamed of. These massive naked short positions need to be looked upon as huge assets that need to be developed. Hopefully the regulators will come to grips with the reality of naked short selling and tactics like "Cellar boxing" and quickly address this fraud that has decimated thousands of U.S. micro cap corporations and the tens of millions of U.S. investors therein. ------------------------------------------------------------------------------------------------ China's Big Outward Leap MARCUS GEE From Saturday's Globe and Mail December 7, 2007 at 8:59 PM EST BEIJING — It's hard to get your head around a figure like $1.4-trillion. Dai Zhi Ping, who makes $500 a month selling the Beijing News from the back of his motorbike, looks perplexed when he is told that China has that much money in its foreign exchange piggy bank. Pausing at his post outside the State Administration for Foreign Exchange, the faceless state agency that manages all that money, he says he doubts any of it will find its way into his pocket. It makes him feel good all the same. “It proves that the country is getting richer and stronger,” he says. “The more we have, the better it is.” Ah, but is it? As proud as Chinese may be of their new riches, the huge stash of foreign exchange earned by China's booming economy has become a $1.4-trillion (U.S.) headache, both for China and the world beyond. Beijing quite literally has more money than it knows what to do with. Related Articles Recent How China's reserves became too rich To relieve itself of that unusual burden, China's leaders have embarked on what one money watcher has called the Great Leap Outward – an attempt to turn China from a passive recipient of other people's money to an active global investor. If it succeeds, it could change the face of global finance. Other countries have grown used to the idea of China as global workshop, flooding markets with the output of its teeming factories. But what if – along with Barbie dolls, Christmas ornaments and DVD players – China started sending its capital to foreign shores? What if it became not just a manufacturing but a financial dynamo, with the power to shake international markets, buy up strategic Western firms or undermine Washington by dumping the U.S. dollar? In a sense, it is already happening. This year has seen the first signs that China, the financial giant, is beginning to stir. In October, the Chinese brokerage house CITIC Securities Co. struck a deal to invest $1-billion in Bear Stearns Cos., Beijing's first major investment in an established Wall Street firm. Soon after, Industrial & Commercial Bank of China Ltd. said it was buying a 20-per-cent share in a big South African bank, Standard Bank, the biggest investment abroad by any Chinese institution. Earlier this year, China Development Bank agreed to put $3-billion into Britain's Barclays Bank. Enter China Investment More is coming. Beijing has just fathered a new investing entity, China Investment Corp., and given it $200-billion in pocket money as a birthday gift. What it will do with that money, a legacy from China's $1.4-trillion trust fund, is the subject of excited speculation in financial circles from Singapore to London. Beijing's growing financial clout has even caused a stir on the U.S. presidential campaign trail. Democratic front-runner Senator Hillary Clinton has said that, with 44 per cent of U.S. debt held by foreigners, Washington needs new laws to prevent Americans from being “held hostage to economic decisions being made in Beijing, Shanghai, or Tokyo.” While governments worry about what will happen when a nationalistic, non-democratic regime starts snapping up strategic assets abroad, Western investment firms see mouth-watering opportunities in the Great Leap Outward. Much of that attention centres on the new-born China Investment and its $200-odd billion in spending money. Where will all that cash go? Who will profit from its spread? And how will it influence the movement of global markets? Just the rumour that China Investment might make a stab at acquiring Australia's Rio Tinto boosted the mining company's stock last month, although the fund denied it was interested in the company, which is facing a takeover bid from mining giant BHP Billiton. The Japanese yen and the Tokyo stock market got a similar leg up when there were hints the fund might put some of its money into Japanese assets. Beijing created China Investment to make better use of its foreign exchange reserves, which have more than doubled over the past 21/2 years as Chinese exports to the world have surged. Most of that money – up to 75 per cent by some estimates – is parked in U.S. government bonds and other securities. These are safe and easy to cash in if Beijing needed the money to defend its own currency from speculators, but they yield only modest returns. China Investment's job is to take a portion of Beijing's foreign exchange pile and invest it a little more aggressively. The company is consciously mimicking the strategy of other governments that have built up an excess of foreign cash, usually by selling oil and other commodities. Dozens of countries from Norway to Abu Dhabi to Kazakhstan have set up so-called sovereign wealth funds to seek better returns from investing their hoards of cash. When China Investment came formally to life on Sept. 29, its $200-billion inheritance automatically made it one the biggest such funds in the world. A bold beginning The company made headlines even before it was born when its forerunner, Central Huijin Investment Co., agreed to pay $3-billion for a stake in Blackstone Group LP, the biggest publicly traded private equity fund in the United States. Normally, said investment analyst Andrew Milligan, a new investing company would start more conservatively, buying first into blue-chip assets and moving gradually up the risk curve. “The Chinese didn't. They immediately moved into private equity, which I found fascinating,” said Mr. Milligan, head of global strategy for Standard Life Investments in Edinburgh. The Blackstone deal and the emergence of China Investment focused intense, almost hysterical, attention on the emergence of China as a new financial giant. “China is buying oil! China is buying Korean equities! China is buying corn! China is buying Ford! China is buying Angola! Expect to hear a lot of this kind of thing in the coming months,” Stephen Green, an economist with Standard Chartered Bank in Shanghai, said in a recent note to investors. China's $1.4-trillion cash mountain casts such a shadow that when the vice-chairman of China's national parliament offhandedly remarked earlier this month that Beijing might want to move some of its money out of “weak” currencies like the U.S. dollar, the greenback went into the tailspin, sending the loonie briefly soaring. These fears are almost certainly overblown. Since the Blackstone deal, China Investment has been painfully conservative. Over the past few weeks, its executives have made it clear they will spend most of their $200-billion not on foreign acquisitions but on helping Chinese banks. It will use one-third of its kitty on cash injections for Agricultural Bank of China and China Development Bank, both state-owned institutions. Another third will go to acquiring Central Huijin Investment, which manages the government's stakes in big Chinese banks. China Investment has said privately it has no immediate interest in taking a big stake in any foreign company. That set it apart from more experienced funds such as Abu Dhabi Investment Authority, which announced last month it was taking a $7.5-billion stake in the troubled U.S. banking titan Citigroup. Even the Blackstone deal, in retrospect, was hedged with caution. China took a non-voting stake, with no right to have a director on the company board. Just 10 weeks old, officially speaking, China Investment is an infant in the world of sovereign wealth, with only about 20 employees so far. It was late last month that it started recruiting in earnest, opening a website in English and Chinese seeking investment analysts, portfolio managers and researchers. Its leading executives, though seasoned, well-educated money men, are far from being buccaneering capitalist raiders. Chief investment officer Gao Xiqing is a lawyer educated at Duke University in North Carolina who helped manage China's national pension fund. Chairman Lou Jiwei is a former deputy finance minister and still sits on China's State Council as deputy general secretary. Mr. Lou said in a speech last week that “we are seeking reasonable long-term returns with acceptable risks.” In the same buttoned-down vein, another leading executive, Jesse Wang, said the fund will be a “passive investor.” Its mission, he said, “is purely investment-return driven.” Politics behind the pressure China's investment officials learned to avoid political controversy when a congressional outcry blocked the purchase of the U.S. oil company Unocal in 2005. The fuss in Canada over a proposed takeover of Toronto mining firm Noranda Inc. by China Minmetals Corp. in 2004 sent a similar signal. All the same, the pressure on China is building. The Americans are already upset over the ever-growing Chinese trade surplus, a product, they believe, of Beijing's decision to keep its currency and wages artificially low. Now they see an added threat – that the money American consumers spend to buy Chinese goods could in effect be recycled by Beijing to snap up key U.S. assets. Europe, too, is losing patience. The European Union expects China's trade surplus with the EU to grow by 30 per cent to $252-billion this year. To help correct the imbalance, Europe wants China to let its currency, the yuan, rise against the euro – a point French President Nicolas Sarkozy made when he visited Beijing last week. The idea that state-owned investment funds run by authoritarian regimes might buy into private markets and influence their movements is disquieting to many governments. The Group of Seven industrialized countries was worried enough to order a study of the funds at a Washington meeting in October. In fact, the $2-trillion to $3-trillion that sovereign wealth funds can marshal pales beside the roughly $53-trillion controlled by private institutional investors. In any case, most such funds are prudent long-term investors whose buy-and-hold strategy serves to stabilize markets in times of panic selling. The idea that Beijing might fight back against U.S. trade pressure by slashing its stake in U.S. Treasury bonds and undermining the U.S. dollar seems especially far-fetched. Sometimes called the “nuclear option” in China's state-controlled press, that would reduce the value of Beijing's foreign exchange reserves by hundreds of billions of dollars – a classic case of cutting off your nose to spite your face. It would also hurt the U.S. economy and cut demand for Chinese products. Even so, China's Great leap Outward is bound to change the global financial landscape over time. Most analysts believe that the $200-billion that Beijing has allocated to China Investment is just the beginning. If its investments pay off, hundreds of billions more could come its way. With piles of foreign exchange piling up in its monetary system, brought in by overseas investors and foreigners paying for China's booming exports, Beijing simply must spend some of it or see its economy drown in the excess liquidity. It is already starting to happen. Annual inflation stood at 6.5 per cent in October, the highest in 10 years. The Shanghai composite index has risen fivefold in two years. Property in big cities is way up, too. Near Shanghai's renowned Bund waterfront district, new apartments are going for $17,000 a square metre. Chinese are even investing in exotic collectibles like vintage tea. ‘Go global' Jim Walker, a Hong Kong economist and China watcher, said China's economy is like a pressure cooker “and the gas is turned up full burn.” Beijing needs an escape valve for its excess cash. Investing overseas is the logical release. “This is a large economy with a very high savings rate,” said David Li, an economist at Beijing's Tsinghua University. “One way or another, our money will have to flow to your economies.” Apart from setting up China Investment, Beijing is taking several steps to help it happen. To begin with, it is encouraging state-owned and private enterprises to invest in overseas companies. Ping An Insurance Co.'s announcement last week that it was buying a 4.2-per-cent stake in Dutch-Belgian financial services outfit Fortis NV is only the latest such foray by a Chinese company. It was the biggest overseas purchase so far by a Chinese insurer. “China's leading companies, particularly its financial and resources giants, can be expected to make a growing volume of overseas investments in the years ahead,” Jing Ulrich, an analyst for JPMorgan in Hong Kong, said in her latest report on Chinese outward investment. China's President, Hu Jintao, said in October that Beijing would “accelerate the growth of Chinese multinational corporations and brand names in the world market.” China's government is also encouraging individual and institutional investors to look abroad. Central Bank Governor Zhou Xiaochuan has been giving speeches around China prodding individual investors to “go global,” as Beijing calls its outward-bound strategy. Under the Qualified Domestic Institutional Investor program, launched last year, Beijing is letting selected financial firms invest in overseas equities. This summer, for example, authorities raised the cap on overseas investments by insurance companies to 15 per cent of the company's assets, up from 5 per cent before. Investors seem enthusiastic. One fund designed to invest in foreign markets attracted 100 billion yuan ($13.5-billion U.S.) in a day when it was offered this fall, a record for a Chinese investment fund. Beijing also says it wants to let Chinese investors buy stocks in the Hong Kong market, a plan known as the “through-train” because it would let retail investors get their money over the mainland-Hong Kong border. So far, these measures are tentative. Beijing recently delayed the through-train over fears of seeing a capital flight. But they signify Beijing's intent to let money flow outward, a serious step for a control-obsessed government that still has many Communist-style controls on the flow of cash and capital. “We don't need to be pushed by the Americans and the Europeans. We will do this ourselves,” says economist Yu Yongding, director of Beijing's Institute of World Economics and Politics. China's coming out as a global investor is just part of a big change in world money flows and the power relationships that follow. Not long ago, investment flowed from the rich world to the poor. Now, the flow is starting to reverse. Developing countries made an estimated $128-billion of investments in developed ones in the first three quarters of this year, up from $14-billion in all of 2003. The shift promises to be particularly momentous in China, with its dynamic economy and its huge population of 1.3 billion. Once the hunting ground for foreign investors, China is starting to play the hunter. The jungle of international finance will never be quite the same. --------------------------------------------------------------------------------------------------- Ammendments to Regulation D ----------------------------------------------------------------------------------------------------------------------- Ammendments to Increased Liquidity Copyright 2007-2008. Mina Mar Group. All rights reserved.