STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
Wall Street Clearing Firm identifies Regulatory Concerns– December 20,, 2004
By Dave Patch
Has the SEC sacrificed our rights as investors to provide the industry member’s rights to illegal profiteering?
Recently a major Wall Street clearing firm held a conference call with their prime brokerage members to explain the recent reform package out of the SEC regarding short selling; Regulation SHO. At face value the call put the prime brokerages on notice that changes are coming and that the methods of deceit used in the past would no longer be accepted in the future. At face value!
To begin with, let me congratulate the SEC on finally coming to the correct conclusion; settlement failures are the root to the issue. For myself and STOCKGATE TODAY, this conclusion is merely 3 years behind the times. Our investor following and our publications have stated this conclusion for nearly 3 years to an indifferent and sometimes hostile federal agency.
Now, here is what this Major Wall Street firm had to say in their conference call:
1. For the past few years we have been hearing from many of the regulators their growing concerns about the increasing number of fails.
2. SEC change came about due to various market participants not following established rules.
3. “The Primary Brokerage area has always been an area in connection with delivery fails and short sales and that the SEC and SRO's have looked at and have had a concern about and will add higher scrutiny in primary brokerage areas"
4. With the newly created threshold security definition the SEC has begun sending a “would-be” threshold list out for the past month. That list, if published today would be about 1000 companies and would consist of approx 50-60 NYSE, 100 AMEX, and approx 100 NASDAQ Companies. The remaining 800 companies would be from the OTCBB and Pink Sheet stocks.
5. Fails will only be calculated using the CNS settlement data. Should the SEC see a growing number of trades being done at ex-clearing to circumvent this rule than the SEC will rethink their regulation. “They are trying to be flexible with the Industry to keep it operational but if they feel that games are being played they will rethink their proposal”.
Hey, Can anybody in Washington calculate?
The SEC has stated on many occasions now that the threshold security list under Regulation SHO would consist of approx 4% of all publicly traded companies. We now hear that the list is approx 1000 fully reporting companies clearing through the Continuous Net Settlement (CNS) system. A recent report from a visiting scholar at the SEC provided highlights that approx 8000 company’s fall into this category of fully reporting thus making this a 12% problem and not a 4% problem. The number only gets worse when non-reporting and non-CNS trading enter into the calculations.
Of higher concern beyond the SEC’s math failures has been their willingness to allow members to violate established rules without taking appropriate actions. SEC enforcement actions that should have included fines and/or suspensions to violators. How much fraud against retail investors transpired under SEC authorized transgressions? When regulators are aware of participants not following established guidelines and fail to take action, they become part and parcel part of the fraudulent act.
Now, in the midst of all of these failures, the SEC is attempting to protect these same firms by being flexible to their needs. The SEC is utilizing the limited failures of the CNS settlements to calculate threshold securities.
When a major clearing firm, representing hundreds of prime brokerages, have fails inside their “Client Network” those fails are not CNS reporting. In other words, stay within the family and the secret is kept. It then becomes an internal compliance issue and the honor system to meet the settlement criteria here. A Loophole is created that will only be closed by a slow and sometimes arrogant SEC agency.
Finally, let’s take a closer look at the present threshold security list and the demographics of those identified. With a breakdown of 50 – 60 NYSE, 100 AMEX, and 100 Nasdaq, the list appears evenly distributed. But to then have 800 OTCBB and Pink Sheet Companies listed it is blatantly clear that the SEC and SRO’s inaction is directly related to a bias over small business issuers and upstart companies. In 2000 the SEC and NASD went before Congress and addressed abuse and manipulation in the micro-cap stocks vowing Zero-Tolerance to those violators. Recent data highlights their failures and their neglect.
The greed of Wall Street is allowing the sale of unregistered securities to manipulate the micro-cap issuers and in doing so have assisted criminal elements launder their money. It is the cover-up of these illegal acts that prompted the SEC to grandfather in all the fraud pre-SHO regardless of the fact that the SEC acknowledges that industry participants were not following established laws when they failed to settle these trades.
The SEC allowed our investments to be manipulated by Wall Street and now they back Wall Street in keeping the ill-gotten gains.
Wall Street and the Securities and Exchange Commission have set themselves up for major bias lawsuits.
More to follow on this developing story as more publicity and more smoking guns surface.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2004
