The inherent problem with Hedge funds is their "unregulated" status. Whenever people are allowed to work in the dark, bad things happen... that has been the driving force on Wall Street for 100 years as excesses and loop holes have repeatedly been plugged... the latest alteration in accounting practices and accountability is just another example of the market evolving to a better position.
The other issue I did not raise but have before, is the universal clearing exchange known as DTCC or by many just as DTC. In the old days of Wall Street shares were held physically in vaults at member firms. So if you had an account with Merril and sold your shares to someone with an account at Kidder Peabody, the physical shares needed to be collected from Merril and delivered to Kidder Peabody and there was an entire industry of "runners" who accomplished this on a daily basis.
The the idea to create a central cleearing house was born and since all the certificates from all firms were held there, all you had to do to mark shares from Merril to Kidder was a ledger entry... this simplified things enormously but still if you were shorting, you were shorting actual real certificates.
Then the digital age came and with it a new idea which on the surface seemed to simplify things even more but in actuality opened a Pandora's Box of trouble by "Pooling" assets. Now there was no longer any matching of certs there was simply shorting against the pool. While this was easier for DTCC to manage, it also meant that you could theoretically(and in practice) short the same certificate an unlimted number of times. This was a critical piece of the scam that allowed it to work, intended or otherwise.
Many companies, including Sunncomm have requested to be removed from DTCC but have been turned down by the very agency (SEC) that supposedly was created to protect shareholders. I can tell you from my personal conversations with SEC staff that they view the naked shorting issues with a decided level of arrogance and indifference. SEC staff has made comments to me such as "Most of these small companies deserve to be shorted" as if they are in a position to pass moral relevance on the companies that "deserve" to make it and those that deserve to go under. It is a sad day when the cops are protecting the crooks and telling the victims that they "deserve" it.
Up to now the free market has been a pretty good mechanism to determine actual worth of a company. What naked shorting does is to upset those normal mechanisms and rather than assist in capital formation, the purpose of our markets to begin with, it in fact is nothing short of (pun) the destruction of capital.
When companies succeed they create jobs, products and capital that resonate throughout the economy in numerous ways. When companies fail, jobs are lost, products dissapear and capital is lost... the only winners are those who helped destroy the company and profited from it. Make no mistake, by artifically depressing the share price of small companies, Hedge funds have driven hundreds if not thousands of companies into a death spiral where they are forced into a dilutionary spiral of issuing more and more shares and selling them at lower and lower prices until they fail.
The SEC presently enforces (or doesn't) naked shorting by keeping tabs on the number of days of failure to cover... naked shorts are supposed to settle (cover) within three days and when they fail to do so, they pop up on the SEC radar screen when the numbers get big enough. The Hedge funds of course know this and so they have devised a strategy referred to as "desking" to mask their operations. This simply amounts to them creating another market maker entity either in Canada or offshore and then trading the shares back and forth between themselves to "refresh" the shares so that the Days Failure to Deliver numbers never get too extreme. This is also another reason the SEC ignores a problem it doesn't know/realize exists.
Hopefully this further explains the problem, which honestly is a bit complicated for people to easily grasp at first. For the record, I have no problem with normal shorting and I see that as normal mechanism to allow the markets to correct for excesses and or hype. It is also my opinion that we have been driven to these levels so that some seriously exposed groups can cover some of their shares while there is still a profit.
AI
