Choose a different title name

[SloJon]

STOCKGATE TODAY

SEC Chairman Donaldson, Pershing, and Fraudulent Liquidity – October 26, 2004 Dave Patch

“How much fraud are you willing to tolerate for Liquidity?” Financial Times

“Greenspan is focused on market liquidity provided by Hedge Funds, while the SEC is charged with preventing fraud – different missions that account for differences of view.” Wall Street Journal

These are the words of Securities and Exchange Commissioner William Donaldson with respect to Hedge Funds and the need to have Hedge Fund advisors register with the SEC. The question is why does Chairman Donaldson continue to use the word fraud in his communications and what exactly is the SEC doing about it TODAY?

To answer that question we must all understand some of the players.

In 2000 a firm called Donaldson, Lufkin, & Jenrette Securities Corporation (DLJ) were major players on Wall Street. DLJ was more than simply a major Wall Street Brokerage; its affiliate DLJdirect was a top on-line brokerage operation and affiliate Pershing was and still is a major player in Wall Street’s Market Making, clearance, and settlement operations. DLJ and its affiliates were sold as a unit to Credit Suisse First Boston in late 2000.

Pershing, the DLJ affiliate clearing firm for many on Wall Street has been listed as a defendant in numerous lawsuits regarding naked shorting. These lawsuits date back to times when DLJ owned and operated Pershing and extend into present day operations. One such lawsuit; Sedona Corporation (OTCBB: SDNA) has already had the SEC confirm that they had been manipulated by shorting abuses in a February 2003 Enforcement action against Rhino Advisors.

In the follow-up $2 Billion civil lawsuit filed by Sedona in NY Federal Court, claims are being made that the settlement failures that were created by the shorting manipulation of Rhino Advisors and their affiliated offshore clients were alleged to be illegally cleared thru Pershing, a DLJ affiliate at the time. According to the filed lawsuit:

“Pershing, illegally converted short positions into false long positions, was responsible for stacking bids and/or offers in an effort to manipulate the stock up or down, and likewise was responsible for the manipulation of Sedona’s stock herein. Upon information and belief, Pershing is a direct participant in the manipulation, in that Westminster clears it’s trades, including but not limited to the trades set forth herein, through Pershing, and that Pershing, among other potential violations, failed in it’s duty as “gatekeeper to the public markets” to report these large suspicious transactions to its superiors, the market regulators.”

Sedona’s claims are that Pershing was facilitating the stock manipulation through failed clearance of the fraudulent short sale liquidity and thus lead to the manipulation of Sedona and their shareholders. Audio tapes of Rhino Executives in possession of the SEC and DOJ captured the executives congratulating brokers for collapsing the stock using shares they did not own. Pershing allegedly not only failed to properly clear and settle these trades but as a market maker in the stock allegedly covered up the short trades by converting them on the books to longs. This is neither the first nor the last complaint of this nature against Pershing at a time that DLJ owned and operated this division.

Fast forward to today.

On June 23, 2004 the SEC released Short Selling Reform SHO intended to eliminate the loopholes that have allowed for fraud and manipulation to take place in our markets. In the release the SEC admitted certain aspects of why this reform was necessary including the issues of naked short selling and settlement failures.

Naked short selling can account for fraudulent acts that are affecting a minimum of 4% of all publicly traded companies according to the SEC. The SEC also states that the magnitude of settlement failures from naked shorting have reached, at times, levels that exceed the entire public float of some companies. Excess share liquidity in these stocks is greater than 100% of the shares registered by the company. The SEC admits that this is an abusive situation that harms the investing public.

Settlement failures, for the record, can only happen when Clearing firms like Pershing fail to meet the necessary standards required to protect the investing public as outlined in the Securities Act of 1934. Settlement failures can only be originated when a seller is selling shares they do not own or have access to - as in “fraudulent liquidity”. Hedge Fund liquidity! Clearing firms that do not force the buy-ins and settlements of the trades thus become active participants in the abusive liquidity as they allow the funds a free ride to sell unregistered shares. The same liquidity Chairman Donaldson speaks of when he lashes out at the Hedge Funds.

Today we have a problem with settling trades and the solution resides within the SEC. Chairman Donaldson can correct the fraudulent liquidity problem he continues to speak of. It does not come with Hedge Fund Registration. The solution comes with cleaning up the behavioral issues of clearing firms willing to accept settlement failures from the members they clear for. Clearing firms like Pershing, a former affiliation of Donaldson, Lufkin, & Jenrette. It comes with the forcing settlement of all trades in a timely and efficient manner as defined by Section 10a of the Securities Act of 1934. It comes with the courage to do the right thing.

The courage of Chairman Donaldson and his Commission however is lacking. Staffers willingly admit that the SEC is either “Not Responsible for forcing the settlement of trades” as stated by John Heine of Media Relations or “We (SEC) cannot force the settlement of the trades because there are more unsettled shares than shares to settle with” as stated by Jerry Carpenter of the Division of Market Regulation. Neither is an answer acceptable to those who have been defrauded and lost nearly $1 trillion in the process. These are more likely answers that show cause for why Investors are being screwed by Wall Street. Regulatory neglect and indifference.

If the SEC has no responsibility for the settlement of trades than who does? Who is it that addresses the fraudulent liquidity that floods our markets with unsettled trades and unregistered shares? Who are the investors to turn to as they buy something they never really receive? Why is Chairman Donaldson afraid to come clean and deal with the issue? Are there skeletons left behind in the closets of DLJ and Pershing that the SEC Chairman intends to leave as skeletons in a closet?

For nearly four months I have continued to ask members of the SEC exactly why the SEC will not address the manipulative trades they highlight in Regulation SHO. Why have they not taken any enforcement actions against these admitted illegal activities? How can settlement failures that become manipulative be allowed to remain unsettled if they are considered MANIPULATIVE by the SEC? The SEC will not provide answers but instead excuses.

Chairman Donaldson’s agency is now reviewing the efficiencies of our Self-Regulatory agencies (SRO’s). He is questioning their effectiveness. Many wonder about the same with regards to the SEC’s performance. Should Congress rethink the value of the SEC in light of the most recent scandals? Would our tax money not be better spent

The SEC continues to tout their successes but what we fail to see are their failures until it is too late. The SEC is clever at keeping those secret until some State Attorney General comes out and forces their hands. The issue of clearing firms contributing to Hedge Fund fraud is coming closer and closer to light. Our State and Federal Courts will take the ball on this even if the SEC won’t.

Many within the Industry have quietly informed the SEC of the issues as they speak of the Behavioral issues in the settlement of our trades. Settlement issues that lead to manipulation through excess supply – liquidity. The Industry is fully aware of the problems but will never change if the top cops do not force their hand. The whistleblowers are out the SEC is just not listening.

While there are no direct links to William Donaldson and Pershing at a Management level, Pershing was a division of DLJ. Recent SEC actions would infer that corporate officers are liable for the activities of those below them. Pershing is well known in and out of the Industry and Pershing is, at least for now, alleged to be involved in helping the criminal elements manipulate our stocks. All of this brings into question the objectivity of now SEC Chairman Donaldson as he casually derails the SEC’s support of the small business issuers and their investors who watch their investments be manipulated by “fraudulent liquidity”.

It is time the Chairman and his staffs come clean and address this issue. Define a clear SEC position regarding the abuses in settlement failures and force all past, present, and future trades to settle in the manner defined by the Securities Act of 1934 - promptly. Anything short of mandatory settlements should not be accepted.

For more on this issue please visit the Host site at www.investigatethesec.com .

Copyright 2004