A good recent article: STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
NASD Links Naked Shorting to the Sale of Unregistered Securities in Complaint – March 3, 2005
On a normal day in December 2004 the NASD filed a complaint that has received little fanfare by way of media attention. Part of the reason that there is little fanfare is because the NASD removed the complaint from their web site as quickly as it was put up leaving little to know it even exists. But this complaint exists under NASD Disciplinary Proceeding number CMS040208 and this complaint links naked shorting to the Sale of Unregistered Securities.
The Complaint; NASD Department of Market Regulation vs. Hilary L. Shane is about a Hedge Fund Manager that traded off inside information regarding a pending PIPE (Private Investment in a Public Entity) financing agreement with CompuDyne. In this case however the NASD also claims that Ms. Shane traded illegally when she sold short hundreds of thousands of shares she did not own nor attempted or had access to borrow, for delivery. In recent months/years this has become the street definition of a “naked short”. Naked Shorting: the selling short of stocks without borrowing for delivery as required for settlement. For her actions the NASD seeks sanctions against Ms. Shane for the Sale of Unregistered Securities in Cause 3 of the complaint.
The implications of this should be deafening to Wall Street and the media yet it has been just the opposite. Wall Street, the Regulators, Congressional Oversight Committees, and especially the media are almost…comatose! Have we suddenly become so expectant of fraud on Wall Street that it deserves no voice for concern?
The NASD has just linked naked shorting to the sale of unregistered securities all the while the SEC passes a reform package (Regulation SHO) that “grandfathered” all prior naked shorting sales from mandatory close-out provisions. Where is the consistency? One regulator calls it fraud and our top regulator gives a hall pass to the illegal practices.
While the first question to ask is, is this an isolated event? A spokesman for the NASD indicated confidentially that it is not. The trading activities of Ms. Shane are not isolated to her specifically or to this single PIPE arrangement. It happens far more frequently. Beyond that no further comments would be made other than to “Stay Tuned”.
Okay, so there are more occurrences of fraud. We already knew that because hundreds of companies are listed on the SEC’s Regulation SHO threshold list with excessive trade failures from sell side delinquencies in delivery (naked shorts). We also know that no illegal act on Wall Street is isolated or without awareness for others to reap similar illegal benefits.
The second question most frequently asked is – how does this affect the average person? Let’s take Ms. Shane’s trading to use as an example.
According to the NASD complaint Hilary Shane executed a total of 975 Short Sale transactions, totally 475,000 shares, into the market with shares she never delivered. Presumably, with that volume of trading more than one buyer and more than one firm representing that buyer was involved on the buy side. Since Ms. Shane only settled these fails with shares she received in the PIPE deal later in time, none of the buying firms represented their clients engaged in forcing Ms. Shane to deliver securities for settlement to remain in compliance to the contract entered into by Securities Rule 15c6-1. The standard requirement for delivery on settlement is 3-days. By virtue of the illegal trades identified, buy side brokerage and clearing firms acted in the same negligent manner with regards to their client as Ms. Shane did allowing us to leap to a conclusion that this settlement failure acceptance is pretty standard within the industry. They colluded together to defraud the buy-side client.
Now consider the sales themselves. Ms. Shane dumped 475,000 shares of illegal shares (naked shorts) into the market place and on to unsuspecting buyers. Her profit in doing this was over $1 Million. If she profited from short selling, somebody had to lose. But more than those that lost from these 475,000 trades are those shareholders who traded this stock alongside Ms. Shane unaware of her actions. Then there are those who merely held on to a stock manipulated by excessive selling. All CompuDyne shareholders lost due to her illegal trading as overall market capitalization was reduced in the Company. Shane manipulated the stock by adding 475,000 illegal shares into the market. If you were not acting as a short seller you could not have benefited to the excess dilution of illegal shares.
Now, if this is not an isolated case how many more Companies and investors have fallen victim to this?
Again I reference the SEC’s Regulation SHO threshold list. On that list are hundreds of companies who maintain excessive unsettled trades on the books of these Wall Street firms. With preliminary lists of NYSE companies being published as early as December 2004, there are many companies that have been oversold with unsettled trades since before December 3, 2004 and remain oversold today. Companies like TASER, Martha Stewart Living, Novastar, and Delta Airlines. Similar actions are happening on the NASDAQ where their preliminary lists date back to October 2004 and still listed today. Nearly 5 months later.
So where have the regulators been in cracking down on the Sale of Unregistered Securities? Really Counterfeit Stocks if you think about it. If you believe the General Counsel of Bear Stearns, they have been watching it all happen and doing nothing about it. At least nothing by way of prompt regulatory enforcement. Statements made in a December 13, 2004 dial-up call to members and clients reveal the deep-rooted complacency, I call it corruption, of our Regulatory bodies. Make your own conclusions:
"To give you that brief introduction in Reg SHO the history how we got to where we are today. For the past few years we have been hearing from many different regulators regarding their concerns about the increase in the level of fails that they are seeing. They believe, and they have stated on numerous occasions, that one of the primary causes of the high level of fails was that various participants in the short sale process, prime brokers, executing brokers, clients were not following already established rules."
These statements, in conjunction with the existence of the “threshold list” of securities, the admittance by the SEC that naked shorting exists, and in basis on the NASD complaint that naked shorting is the sale of unregistered securities it paint a very ugly picture of Chairman Donaldson’s Organization and our Congressional Oversight Committees. These statements theoretically imply that our Securities Regulators aided and abetted in the manipulation of our investments through the act of naked shorting. Instead of taking enforcement actions, they made casual conversation about the fraud. This theory the SEC staunchly denies but they will not explain the circumstantial events either.
Where is Congressional Oversight in this? To my personal knowledge many members of Congress received Constituent Complaints. Several Members, including Senate Banking member Senator Paul Sarbanes and House Financial Services member Rep. Barney Frank even responded on behalf of the constituents by asking the Chairman of the SEC for answers. Where these Congressional members dropped the ball, as they so often do, was with the follow-up validations on the SEC responses. Senator Sarbanes was actually misled, a lesser man would say lied to, by the SEC and the Senator never raised an eyebrow. His staff was provided the documentation to support these claims of misdirection yet the Senator chose to ignore the slight indiscretion of the SEC. Oversight by ignorance is far from valued oversight.
I guess that leaves the means of solving this problem to those comatose media personalities and the rest of the investing public. It is our duty to connect the dots and start asking the tough questions about how we are being protected by the “standard” practice of the sale of unregistered securities. After all, how do any of us know where we fall with respect to investments safeties if Wall Street will settle trades in an arbitrary manner?
They say you can either be part of the problem or part of the solution. Courage comes with being part of the solution. Our Federal Oversights appear more willing to be part of the problem.
For more on this issue please visit the Host site at www.investigatethesec.com .