Nano Global Inc (NNGB)

[Bullseye104]

Wall Street’s Conflict of Interest Continues – January 2, 2005

David Patch



Illegal short selling. The shorting of a security whereby, at settlement date, the executing broker-dealer fails to borrow a share for delivery at settlement. The result, a persistent and abusive fail in the system. While this is a violation of several Securities Laws, to date nobody has actively enforced such laws. It has become a financial conflict of interest.



Regulators like the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) identifies the illegal shorting as complicated. Of course it is complicated, illegal shorting creates trade volumes and trade volumes create revenues. Illegal shorting also creates sell side pressure and sell side imbalance, pressure that steals from long shareholder investments.



The complication comes by way of ethical conflict vs. greed.



The Depository Trust and Clearing Corporation (DTCC) is a monopolistic Wall Street agency that has responsibility for the clearance and settlement of all trades. The Agency, operating as a self Regulatory organization (SRO), has a boardroom full of Wall Street executives. This agency is responsible for maintaining records of trade settlements, becomes a centralized stock loan department, and is required to penalize those who abuse the settlement system. The latter is rarely executed.



When a trade takes place, the SEC receives a fee from both the buyer and seller that is used to pay a portion of the SEC’s costs. Likewise, the DTCC will receive a fee for every trade that passes through their agency regardless of whether the trade settles or not. To both, trade volumes mean money. For the DTCC, if they get too much money, they will rebate Wall Street but Wall Street will not rebate the clients.



As the latest David vs. Goliath was developing, Wall Street vs. Small issuers and investors over the “naked shorting”, the DTC stated publicly:



"DTC rules do not allow its participants to be short in deliveries to other participant firms. While a brokerage firm can lend shares to an investor, the brokerage firm cannot be short in delivering shares to another brokerage firm through DTC. If necessary, a firm can and must borrow shares from one or more brokerage firms that currently have enough shares in inventory to lend. Brokers who fail to deliver shares owed at DTC are subject to penalties."



But this statement is directly refuted by Professor Leslie Boni, a visiting economic scholar to the SEC and the SEC themselves. In the Professor’s report, “Strategic Delivery Failures in the US Equity Markets” the professor used data provided by the NSCC, a division of the DTCC, to expose the magnitude of fails in the US equity trading system. The professor claims that not only are fails persistent in the markets but that the decision to borrow shares has nothing to do with settling trades but instead is based on the cost to borrow a share for delivery. The professor’s report highlights that over 50% of all eligible trading securities have persistent fails in the system.



So where are those penalties the DTC imposes on broker-dealers who fail to deliver shares? If a firm cannot be short in delivering shares to another firm at the DTC, how is it the DTCC system has significant fails on their books, fails that have a mean time to delivery of 13 days on the NYSE, NASDAQ, and AMEX and 56 Days on the OTCBB and pink sheets according to the DTCC’s own documents?



The ultimate answer falls into a simple phrase. Grandfathered Fraud! The SEC, in their newly created short selling reform Regulation SHO had identified that the magnitude of fails was so prevalent in our markets that they would be required to grandfather in all past fails as being exempt from a mandatory close-out. That is right, the SEC grandfathered in fails that violated the law because of the shear magnitude of the fails in the system. It meant nothing to the SEC that the fails were securities violations in the first place. It meant nothing that a Wall Street controlled DTCC was hiding the evidence of fails from the investing public; the fraud was so prevalent we had to grandfather it. Section 17A of the securities Act of 1934 required prompt settlement of trades. Rule 15c6-1 require broker-dealers to only enter into a contract for trades that would not exceed 3-days and yet the DTCC’s own records indicate massive violations that have never been enforced.



Today, there are over 1000 publicly traded companies with persistent fails in the system. Those companies include household NYSE companies such as Martha Stewart Living, Delta Air lines, and Winn Dixie. We know this because the NYSE posted their problem securities on their web site. All 60 of them. The NASDAQ will be posting their first threshold list on January 7th. Expect to see more household names listed.



The conflicts of interest on Wall Street are too prevalent to expect Wall Street to police themselves. When confronted with an ethical situation Wall Street has repeatedly proven that their greed for power and money would lead their decision making process. This is only further exacerbated by a Federal Agency, the SEC, willing to look the other way due to the contributions this power and money can bring into Washington.



While I do not have all the answers to this one, this is for certain you do not grandfather in fraud simply to protect the financial stability of those who committed the crime. We did that with the research conflicts and our economy suffered because of it. We are now doing it with the foundation of our markets - trade settlements. What are our markets if the buyer is not provided the goods purchased?



To research more into this story go to:



http://www.unm.edu/~boni/Fails_paper_Nov2004.doc - “Strategic Delivery Failures in US Equity Markets”



www.nyse.com/threshold - NYSE List of Settlement Problem Securities



http://www.sec.gov/rules/final/34-50103.pdf - SEC Regulation SHO



Wall Street has yet again proven ethics plays second fiddle to greed in their homes. Ask your Congressman how this can continue in a Nation who’s foundation is equal rights.