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StockGate: Berlin Exchange Welches Again On Promise; Schwab Says Sayonara

Thursday , July 15, 2004 00:55 ET

Jul 15, 2004 (financialwire.net via COMTEX) -- (FinancialWire) Add Force Protection (OTCBB: FRCP) and Cyber Digital Inc. (OTCBB: CYBD) to what is now becoming a list of companies such as XRAYMEDIA (OTCBB: XRYM) that the Berlin-Bremin Stock Exchange has flatly turned down their demands for delisting, welching on a public promise made to FinancialWire that it would delist any company that requested it.

At the same time, Charles Schwab & Co. (NYSE: SCH) is exiting the market-making business. It is one of several market makers that have been the subject of accusations and/or legal entanglements over naked shorting allegations and issues.

The company had said it is either the number one or number two market-maker in more than half of all of NASDAQ's (OTCBB: NDAQ) listed stocks.

Recently observers were surprised to find a comment letter submitted to the SEC by Mike Alexander, Senior VP of Charles Schwab, that admits outright that brokerages regularly ignore rules and regulations, saying it is not rules that need to be written; it is changes in behavior that is needed.

The comments were directed towards proposed changes in the U.S. settlement system, but could easily apply to other regulations as well.

"Improvements in the U.S. settlement system will only be truly achieved if and when regulations are rationalized to ensure that all market participants are held accountable for compliance. For example, the industry has struggled with the issue of institutional trade affirmation for quite some time now. While the benefits to the clearance and settlement system are self-evident, Buy-Side firms and Custodian banks have been resistant to make those changes that provide for same-day trade confirmation / affirmation and assurance of trade settlement," said Alexander.

"Schwab opposes the notion that securities intermediaries such as broker-dealers be required to police compliance," he stated. "The NYSE and other SROs have had trade affirmation rules on their books for some time. However, such rules have not been effective in changing the behavior

of Buy-Side firms or their custodians; nor do the rules provide assurance that the affirmed trade will settle.

"Recognition of this fact is evidence that changes to the settlement cycle not only require overhauling systems, but also changing behavior. We believe that only by holding all market

participants directly accountable for making required affirmations will the necessary changes to behavior," he stated at http://www.sec.gov/rules/concept/s71304/charlesschwab061604.pdf .

In a June 23 release, the SEC stated it has put into place Rule 202(T), which establishes procedures to allow the Commission to temporarily suspend the operation of the current "tick" test in Rule 10a-1, and any short sale price test of any exchange or national securities association, for specified securities.

Through a separate order, the Commission will suspend, on a pilot basis for a period of one-year, the tick test provision of paragraph (a) of Rule 10a-1, and any short sale price test of any exchange or national securities association, for approximately one-third of stocks in the Russell 3000 index.

The order also will suspend, on a pilot basis for a period of one year, the tick test provision of paragraph (a) of Rule 10a-1 for short sales executed in any security included in the Russell 1000 index after 4:15 p.m. Eastern, and all other securities after the close of the consolidated tape, and until the open of the consolidated tape the next day.

The pilot will commence on January 3, 2005 to permit broker-dealers and self-regulatory organizations to make the necessary programming adjustments.

The Commission deferred consideration of the proposal to replace the current "tick" test of Rule 10a-1 with a new uniform bid test. The Commission could reconsider any further action on these proposals after the completion of the pilot.

Rule 203, which will incorporate current Rule 10a-2 and will create a uniform Commission rule requiring broker-dealers, prior to effecting short sales in all equity securities, to "locate" securities available for borrowing.

There will be limited exceptions from the locate requirement, including for short sales by registered market makers in connection with bona-fide market making.

Rule 203 also imposes additional requirements on designated "threshold securities." Rule 203 defines a threshold security to mean an equity security for which there is an aggregate fail to deliver position for five consecutive settlement days at a registered clearing agency of 10,000 shares or more and that is equal to at least 0.5% of the issue's total shares outstanding.

Where a clearing agency participant has a fail to deliver position in threshold securities that persists for ten consecutive days after settlement, the participant must take action to close out the position. Until the position is closed out, the participant, and any broker-dealer for which it clears transactions, may not effect further short sales in the particular threshold security without borrowing or entering into a bona fide arrangement to borrow the security.

Rule 203 will become effective 30 days after publication with a compliance date of January 3, 2005, to permit firms to make programming and procedural adjustments.

Rule 200, which among other things, will redesignate current Rule 3b-3 with some modifications to define ownership and aggregation of securities positions, and include a requirement to mark all sell orders in all equity securities. Rule 200 will become effective 30 days after publication.

The Commission also adopted amendments to Rule 105 of Regulation M to remove the current shelf offering exception, and issued interpretive guidance addressing sham transactions designed to evade the rule.

The amendment applies to short sales effected within five days prior to the pricing of a shelf offering. Such short sales may not be covered with offering securities purchased from an underwriter or other broker-dealer participating in the offering.

The Rule 105 amendments will be effective 30 days after publication in the Federal Register, and the interpretive guidance will be effective upon such publication.

Opponents of naked short selling were, however, quick to denounce the provision that allows market makers an exemption, and many market observers said that the SEC should provide a public list of companies that fall into the "threshold security" category.

"The SEC claims that the number of companies involved in this 'threshold security' category is 4% of all publicly traded companies. If in fact it is that small the process is certainly manageable," said the website InvestigatetheSEC.com at http://www.investigatethesec.com . "It is also the right of every issuer, in protecting their business and their investors to know the status of their stock trading."

Some were discussing whether the SEC can keep such information private under the Freedom of Information Act.

The marketplace is already upset over promises by the Berlin Stock Exchange, since broken, that it would delist any company upon request.

"Please understand that cessation of trading in the shares of XRAYMEDIA Inc. (OTCBB: XRYM) is not possible," the exchange told one such requester.

It's not just U.S. companies such as Whistler Investments (OTCBB: WHIS), Sonoran Energy (OTCBB: SNRN), Celsion Corporation (AMEX: CLN), and eLinear Inc. (AMEX: ELU) or Israeli companies that have had serious concerns about their unannounced and unathrorized listings on the Berlin-Bremen Stock Exchange.

Apparently, some 150 British companies are protesting the same fate.

A number of UK-listed companies have demanded a London Stock Exchange investigation after they found that their shares are being traded.

Meanwhile, Whistler, Sonoran and eLinear have announced they have successfully secured their delistings, and the U.S. Securities and Exchange Commission has rescheduled its open hearing to consider the adoption of amendments to Regulation Sho to July 15 at 9:30 a.m. The announcement is at http://www.sec.gov/news/digest/dig061504.txt .

According to the London Money Telegraph, "several companies believe the market for their shares has been distorted and that they have fallen in value after trading started on the Berlin-Bremen exchange.

"Some smaller companies, whose shares are lightly traded in London, fear the Berlin market has been used by speculators to short-sell their shares."

The Telegraph said the number of companies are thought to be as high as 150, including even "larger companies" such as Matalan (OTC: MATNF) and Halfords.

Mladen Ninkov, the chairman of Aim-listed Griffin Mining (OTC: GFNMF), was quoted as saying: "We were put on the Berlin market without our knowledge by a German broker and now we've got about 8m shares out in a short sale. It is horrifying - that is about 4 per cent of the company and it is forcing the price down."

A spokesman for the London Stock Exchange said: "If there is evidence of market abuse we would refer that on to the appropriate authorities."

Whistler said that according to its transfer agent records, "we have 5,504,680 shares held by DTC, but the ADP broker search indicates of 6,217,458 shares being reported by broker/dealers as being held on behalf of their customers, indicating a short position of more than 700,000 shares. A summary report can be viewed at http://www.whistlerinvestments.com/shorts.html .

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