If longs are so long read below:
WHAT A STOCK CERTIFICATE LOOKS LIKE:
Certificate Picture
Here is an annecdotal -- though admittedly made up -- story of how certs are pulled from DTC. I didn't write it, it's long, and consider it a bedtime story.....
As Great White Marine builds its base and moves forward as a company, the most important thing that we can do as shareholders to assure that the stock is trading at FMV (Fair Market Value) is to pull our physical stock certificates.
This is an unusual thing for most shareholders to do and we have found that in general our brokers are usually less knowledgeable than the loyal JAWS shareholders known affectionately as SLOGs (Still Long On Great White).
Through the efforts of many posters on the Yahoo board, we have been able to discover how the certificate pulling process works. There is still a lot of information that is not as clear -- do naked shorts settle through the Depository Transfer Company (DTC), what is the accounting procedure at the DTC, and how are buyins effectuated when a brokerage firm runs out of certs?
The following is an edited version of a three-part series I posted on Yahoo in response to a post by wayne231_98. Click here to read his post. While I have done some research on the workings of the DTC, some of the actual workings of the DTC described below are based on my analysis and some speculation. The actual cert pulling process is factual. One thing that is crucial in the cert pulling process is to learn how the process works and then pressure your broker. Click here to read flightlessbird’s series on pressuring your broker.
The most useful parts of Wayne’s post were the glimpse it gave us into the bowels of the DTC -- the cubbyholes in the underground vault -- and the information on the DTC buyin process. The information on the accounting with the two lists is helpful if one keeps in mind that most participants in the stock market pay little attention to the relationships between certs and shares.
On the actual process I can positively say that Wayne's active trader is just wrong on the way the process works. I have talked to Eva, the tranfer agent for JAWS, the head of Securities Tranfer Dept for Schwab, a Senior Rep in the Chairman's Division at Schwab, the transfer dept for Everen Securities, and numerous brokers who ALL agreed that the INITIAL process in the cert pulling process is the one described below. Most others on this board concur.
The process starts when the shareholder calls the brokerage firm and DEMANDS their certs. The firm sends the client's request to the DTC, where a DTC agent goes into the innermost depths of the DTC and ferrets out a certificate from the JAWS cubbyhole holding all of the certs in street name. The most common denomination is for 10,000 shares. The DTC agent records that is being withdrawn in the name of XXX brokerage and is sent to the TA.
Eva, the TA, voids the cert and issues two new certs, unless the cert pull was for the exact 10,000 shares in which case one cert is issued to the shareholder. If the request is less than the face value of the cert, one cert is made out to the shareholder and the other for the remainder is made out in street name. I think that now the DTC, because of the tremendous volume, may be batching the cert requests, so that they wait until they get requests equalling the denomination of the cert. The certs are returned to the DTC which records the shareholder's cert and sticks the streetname cert back into the JAWS cubbyhole. The shareholder certs are then sent out.
This accounting when the certs come back from the TA gets tricky and this explains why the sending out process takes a day or two and the recording process when the certs come back takes a week to 10 days. Sending out means grabbing a cert from the cubby hole -- the accounting isn't done at this point except to record that certs in street name were taken out on behalf of XXX brokerage from the common pile of street name certs in the cubbyhole. It is gets recorded in the DTC’s log, the SCL, and the accounting takes place when the DTC gets the certs back from the TA. At that point they reconcile the cert pull with the brokerage’s account.
There is where it gets tricky. An E-trade client has pulled certs but they do not have any claim on that pile in the basement. That pile in the basement is held in nominee name -- CEDE & Co -- and the allocation is recorded on the SCL The accounts for certs were determined by the original list of MMs that the company gave the DTC when Eva shipped the pile of street name certs for the cubbyhole. Since E-trade is not on the original list the DTC has to force E-trade to buy in from the E-trade owing sellers list to account for the physical certs issued to the shareholder. And here the process Wayne's source told him comes into play. I would keep in mind in reading it what Calvin_Coyote found out about the 45 days, and more, that brokerage firms have to deliver certs once the pile in the JAWS cubbyhole in the basement disappears:
1. The DTC contacts the oldest seller on the owing list and requests delivery of certificates within 3 days.
2. If delivery of certificates from the seller is not made within 3 days, the order is sent to the settlement desk of the DTC.
3. The settlement desk buys-in the seller to settle the owed certificates."
This is the standard for the settlement of all shares at the DTC. But now the DTC has to account for certificates as opposed to just shares and this is why it is taking so long for the brokerages that are not on the original list of those with a claim on the street name certs in the cubby to get certs requests filled. The DTC has to buy in the owing seller to get those certs. For those whose brokerage is on the original list, the cert pulls take about 4 weeks allowing Eva a week to process them.
After E-trade gets the buyins to get the certs for their customer those are deducted from the bought in brokerages' original account. What happens to the 6,000 street name certs coming back to the DTC as change? Do they go back on the pile downstairs into the common pool of street name certs? If the DTC bought in only enough to cover the E-trade shareholders' cert request, then there would be no adjustment to the original list. If they bought in for more, then E-trade would get a credit. IMHO DTC has been caught with the discrepancy between their two lists.forced into keeping two lists one for shares and one for certs perhaps for the first time in the history of the DTC.
NEVER before IMHO have they faced the prospect that a pile in any cubbyhole in the basement would run out because of individual shareholder's requests. Most piles are gathering dust even in the pristine air of the underground vault.
NEVER before again IMHO have they had to face the problem of reconciling their electronic accounting of shares with the pile of certificates in the basement.
RARELY have they had to confront the effects of a massive naked short position in their electronic system. See the Yahoo news for AZNT on 9/11/98 for another example.
Always before -- since the advent of electronic accounting -- they were able to not have to deal with the discrepancies on their books between the total shares owned by their clients -- the brokerage firms -- and the number of certs in the basement. With legal shorting the number of electronic shares and the certs downstairs should remain roughly equal. However, when a naked short is introduced a discrepancy builds between shares and physical certs. This discrepancy doesn't exist on the individual brokerages two lists mentioned by Wayne's trader. It exists between electronic shares and certs. The DTC never dealt with this discrepancy before, because it is irrelevant until the guy going into the basement begins to say that the pile is getting mighty low. (In the AZNT it was a court action that forced the DTC to reconcile the discrepancy between shares and certs -- not the pile getting low.)
The reason they don't confront it is that the companies' have two sheets mentioned in Wayne's post:
"The number of shares held by each brokerage is kept by electronic entry and the aggregate total does not have to match the number of certificates actually on hand. Each brokerage account at the DTC for each company has two numbers..physical certificates on hand and certificates owed with a list of sellers owing the certificates."
Here again we need to focus on the distinction between certs and electronic shares. What the DTC reconciles every day is the electronic shares bought and sold. The list of the buys must add up to the same number on the list of owing sellers. A naked short would show up as a buy on Schwab first list and a owning sale from the shorting MM on their second list. The numbers for the buys and sales for a stock for the day are reconciled. A separation has occurred between the electronic shares and the certs. The short has collected the money from the brokerage and gone on the electronic list of owing sellers. The short has produced a commodity -- an electronic share -- and sold it on the market and the transaction is recorded on the electronic scoreboard. The shorts can do this indefinitely as long as they can keep the DTC guy from going into the basement too much.
Their trouble begins when the DTC has to go to the first seller on the owing seller's list and say that they have to produce certs to XXX brokerage to meet a cert pull request. The shorts IMHO have had to face a few buyins recently to deal with the certs. It has been infrequent because many at the head of the list of owing sellers were the original MMs who have plenty of credit for that pile in the basement. Schwab had plenty of credit, but knew that Nuts' 1mm request would cut heavily into their ability to satisfy the buyers' (of the first shares) demands for certs. Down the list aways, and we are probably now at that spot, we begin running into naked shorts who now head various brokerages' owing sellers lists from which they make their demands for certs. Hence the shorts' panic and the SD article and the shaking of the tree when they have to produce certs. When someone like Ease, who is holding certs, falls into their hands, it is indeed ripe fruit -- bananas, I guess. (Not knocking you ease. I understand your sale, but not your need to continue to justify it.)
It is in my mind a slow, but steady buyin that is underway, but which is just gaining momentum which will continue to build. The real fun will begin when the basement guy says, "That's it. The pile is gone and the JAWS cubby is empty."
Wayne’s Post
DD on certificate requests by: wayne231_98 58188 of 62312
Yesterday morning I had a very long and interesting conversation with an active trader. Here is what he told me on how the system works.
All certificates held by brokerages in street name are held in a cubby hole for a particular company in an underground vault at the DTC. It does not matter what company it is. If the certificate is in street name it is there. The number of shares held by each brokerage is kept by electronic entry and the aggregate total does not have to match the number of certificates actually on hand. Each brokerage account at the DTC for each company has two numbers..physical certificates on hand and certificates owed with a list of sellers owing the certificates. Accounting of these two numbers along with the list of owing sellers is settled at the close every day and transmitted to the brokerage house by the DTC.
When a request for certificates is made by a client the brokerage house transmits electronically to the Transfer Agent a request for certificates in the clients name. The Transfer Agent then transmits to the DTC a request for certificates from the brokerage's account. The DTC physically removes the certificates from the cubby hole in the vault, debits the brokerage's on-hand account and sends them to the Transfer Agent who registers them in the clients name and sends them to the client.
When the Transfer Agent, on behalf of the brokerage, requests from the DTC more certificates than are in the on-hand account of that brokerage, the following transpires:
1. The DTC contacts the oldest seller on the owing list and request delivery of certificates within 3 days.
2. If delivery of certificates from the seller is not made within 3 days, the order is sent to the settlement desk of the DTC.
3. The settlement desk buys-in the seller to settle the owed certificates.
This takes place for each request made individually and is done daily by the DTC in the course of bussiness.
flightlessbird’s “Fight Fire with Fire.”
FIGHT FIRE WITH FIRE PART 1 (REPOST) by: flightlessbird 50502 of 62320
It is time to fight fire with fire. It is time to put the coals to the feet of the shorts and let them scream in agony. They have tested my patience to the outer limits, and it is now time for payback.
They have lost. We are in the tenth round and they are against the ropes.
The only problem is we are so exhausted we barely have enough strength to stand ourselves. I ask everyone to summon up enough reserve energy to
1) remain patient as nature takes its course in this financial drama, and 2) throw a few final shots to the opponent’s jaw.
Here we go. Disclaimer: The following is not legal advice but a personal suggestion on how to handle the issue of pulling certificates with your broker. If you have any legal questions or concerns you should consult your own attorney for such matters.
It is obvious that the shorts are no longing shorting in any significant quantity. Somebody phrased it well earlier: the shorts and Nuts are at an impasse. I won’t claim to understand the invisible hand that controls Nuts or his decisions any longer. But we must move forward. I also do not know precisely when the Form 10/Sb-2 will be filed but I trust that it will and that Pritchard will do an outstanding job on it. In the mean time, we must move forward.
We can’t control Nuts. We can’t control Pritchard. We CAN control our own actions however.
It is my very firm opinion that much of the delay in any pressure being forced upon the short position has to do with our BROKERS and not with DTC or Eva.
DTC is a very regulated machine. They don’t cut deals with anyone.
Eva only slows the process up AFTER the certs have been sent to her for reassignment to individuals. I believe that BROKERS are dragging their feet and not following through on requests.
Remember that brokers have every incentive NOT to fulfill these requests as they are concerned that you may take your certificates to another broker when you decide to sell them. They are NOT going to set up the most efficient procedure to accelerate the transfer.
Accordingly, the FASTER and SOONER we as investors can accelerate the submission of the request by our broker to DTC, the faster you will receive your certificates. Obviously, I must reiterate that the actual decision to pull certificates is an individual one and that the content in my posts here addresses only those individuals who have already independently made a decision not to have their shares used against them by the shorts.
That having been said, I have put together what I consider to be a formal protocol for accelerating this process. If anyone has any further suggestions or finds that other means of pressure can be applied, I welcome all comments.
FIGHT FIRE WITH FIRE PART 2 (REPOST) by: flightlessbird 50503 of 62320
ROUND ONE
Round one consists of a phone call to your broker. You are to locate the department that specifically handles certificate requests. Please immediately ask for the name of the individual you are speaking to and record it. Inform them of the date in which your request was submitted (assumes you are not requesting for the first time).
Ask this person for 2 specific dates: 1) when will this request be submitted to DTC, and 2) when can you expect the certificates to be in your actual hands. Your next statement should be close to the following: "I plan on checking back with you Mr./Ms. X next on [date] as you have provided me to ensure that this process is going smoothly and according to NASD regulations."
ROUND 2
This round occurs on the date by which they have promised to submit your request to DTC. You are now to call back and speak to the individual you already spoke to. You can pretty much assume that they will not have yet submitted your request. If they have, then you are fine and should call back once a week to request a status update simply to make sure that they suddenly don’t "lose track" of your request or find that their computer no longer says the request is submitted. MAKE SURE TO CALL ONCE A WEEK EVEN IF THEY ASSURE YOU IT IS WITH DTC. Now assuming they have NOT filed your request with DTC yet, you should ask to speak with the MANAGER.
They have missed a deadline and you should be PISSED at this point. Take down the manager’s name and politely inform him or her that you are simply seeking compliance with NASD regulations and the proper execution of this request. Ask him for the date with which he can assure you your request will be submitted to DTC.
Inform him or her that you will check back on that date and will hold this individual personally responsible to oversee the execution of this request and
THAT YOU UNDERSTAND OTHER FIRMS HAVE BEEN HAVING DIFFICULTY FINDING CERTIFICATES ON THIS STOCK AND YOU DO NOT WISH TO HAVE TO FILE A FORMAL COMPLAINT WITH NASD.
FIGHT FIRE WITH FIRE PART 3 (REPOST) by: flightlessbird 50504 of 62321
ROUND 3
Round 3 assumes that either you still haven’t received assurances that your request has been submitted to DTC or that it has been submitted to DTC but they have now missed the date with which you were supposed to receive actual shares. Confirm this with the manager you spoke to in Round 2. Now this is where it gets good. Here is a sample letter that you will fax to:
1. The manager;
2. Your brokerage firm’s Compliance Department; and
3. Your brokerage firm’s legal counsel
You will obviously need to call your broker to find the separate fax numbers to send this to. Here is the body of the letter:
Dear Sir or Madam:
I am serving you with this notice of my intent to file a formal complaint with the NASD regarding certain failures of [manager] and [brokerage firm] to comply with NASD regulations.
On [date] I requested the delivery of [number] shares (in physical certificate form in my name) of Great White Marine & Recreation (JAWS). [Detail intermediate history including dates you were told and who you spoke to]. I believe that [manager] and [brokerage firm] are not treating my request seriously and I plan to file a formal complaint with NASD naming [manager] and [brokerage firm] as the responsible parties for failure to execute my very simple request. I will file this formal complaint if I have not heard a response within 10 days of this fax that I believe provides me with adequate assurance that I will have my certificates within an appropriate time period.
The formal complaint will allege violation of NASD regulation 240.15c3-3 and other applicable regulations for failure to fulfill this request in a timely manner. I have paid for these certificates and I am entitled to them. If you cannot offer me a valid answer for why I have not received my certificates by the date you initially stated, I will move forward with the NASD. I can be reached at [phone] between the hours of [hours]. I appreciate your immediate attention to this matter.
Sincerely, [name] FIGHT FIRE WITH FIRE PART 5 (REPOST) by: flightlessbird 50505 of 62321
THIS should result in some fairly prompt action on your request I assure you. A
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