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Saturday, April 16, 2005 5:55:51 PM
Confronting or Avoiding the Naked Short Selling Scandal
http://www.antandsons.com/faceoff/
By Thomas Catino
Chief Architect, Columnist
April 2005
Issue: The horrible practice and financially devastating effects of naked shorting in the financial marketplace. In general, naked shorting is defined as selling a security short without borrowing the necessary securities to make a delivery, thus resulting in a failure to deliver the securities to the rightful owner. The main goal of naked short selling is to engage in harmfully affecting the stock price of a company in order to manipulate and create downward pressure on the security. This ultimately affects a corporation’s ability to raise money by selling stock to the public because its stock price becomes too depreciated. It is estimated that this harmful and serious practice that has caused billions of dollars in damage.
Confronting: Naked short selling has been fiercely combated by many corporations, including vigorous attempts by a small publicly traded company named Universal Express. "Universal Express, which has been in the forefront of the battle against the 'naked shorters' since 1997 has pending a viable suit for extensive monetary damages against the SEC and others in Federal Court in Florida,” according to Richard A. Altomare, Chairman & CEO of Universal Express. With the support of numerous organizations, individual investors and public companies have brought this issue to light and naked shorting is just now starting to come under the microscope. You can bet that this will be just the beginning of heated times.
Avoiding: The DTC has recently distanced itself from the naked short selling scandal. "The Depository Trust & Clearing Corporation (DTCC) has provided its bank and broker customers with a detailed explanation of its Stock Borrow program and the issue of naked short selling in an effort counter a widespread campaign of distortions and misleading information." said Stuart Z. Goldstein, managing director of DTCC Corporate Communications and spokesperson for the company. The latest press release from the DTCC indicates that their position to insist on their lack of responsibility in the naked short selling scandal will continue to stand. The press release goes on to read that the DTCC's "aim is simply to correct misstatements of fact. We have confidence that our regulators, who carefully review our activities, understand that short selling is a trading strategy and is not related to the post-trade clearance and settlement process." Clearly there is a denial of accountability of who is responsible for this ongoing problem.
Confronting: Recently, EagleTech Communications issued an open letter responding to the statements posted on the DTCC website by First Deputy General Counsel Larry Thompson similar to those of Stuart Goldstein. The company believes that the Stock Borrow Program clearly leaves the door open to naked short selling, citing evidence in the 73 page Treatise entitled, Short Selling, Death Spiral Convertibles, and the Profitability of Stock Manipulation by Professor Finnerty of Fordham University. One reason is that "sellers can continue to fail to deliver because the NSCC can borrow the shares it needs to meet its clearing obligations through the stock borrow program." Another is that the stock borrow program allows the shares to be recycled. Each stock loan gives rise to another stock futures contract. Any single share could actually be relent multiple times, giving rise to multiple futures contracts." This is certainly contrary to the position that DTC Counsel Larry Thompson holds. To conclude, the company pressed the DTCC in producing Eagletech's court ordered trading records, which will clear the air in showing the truth as to how the Stock Borrow Program has negatively affected Eagletech’s publicly traded shares. However, given the historical stance of the DTCC on this issue, it will be difficult to see if any resulting actions will be taken to rectify the situation.
Avoiding: It appears that the Securities and Exchange Commission has now backed down from their former toughened stance on naked short selling. In the Securities and Exchange Commission's own words, "naked short selling is not necessarily a violation of the federal securities laws or the Commission's rules." The reasons given involve the debate over the sometimes innocent causes of failing to deliver shares or stock certificates. According to the Securities and Exchange Commission, "failures to deliver may result from either a short or a long sale. There may be legitimate reasons for a failure to deliver. For example, human or mechanical errors or processing delays can result from transferring securities in physical certificate rather than book-entry form, thus causing a failure to deliver on a long sale within the normal three-day settlement period." At first glance, it appears that the Securities and Exchange Commission will fail to take additional force to strengthen Regulation SHO. Because the Securities and Exchange Commission has now given the impression that the ongoing battle against naked short selling is nearly an allusion, it will be a long while before the best interests of investors are finally defended.
http://www.antandsons.com/faceoff/
By Thomas Catino
Chief Architect, Columnist
April 2005
Issue: The horrible practice and financially devastating effects of naked shorting in the financial marketplace. In general, naked shorting is defined as selling a security short without borrowing the necessary securities to make a delivery, thus resulting in a failure to deliver the securities to the rightful owner. The main goal of naked short selling is to engage in harmfully affecting the stock price of a company in order to manipulate and create downward pressure on the security. This ultimately affects a corporation’s ability to raise money by selling stock to the public because its stock price becomes too depreciated. It is estimated that this harmful and serious practice that has caused billions of dollars in damage.
Confronting: Naked short selling has been fiercely combated by many corporations, including vigorous attempts by a small publicly traded company named Universal Express. "Universal Express, which has been in the forefront of the battle against the 'naked shorters' since 1997 has pending a viable suit for extensive monetary damages against the SEC and others in Federal Court in Florida,” according to Richard A. Altomare, Chairman & CEO of Universal Express. With the support of numerous organizations, individual investors and public companies have brought this issue to light and naked shorting is just now starting to come under the microscope. You can bet that this will be just the beginning of heated times.
Avoiding: The DTC has recently distanced itself from the naked short selling scandal. "The Depository Trust & Clearing Corporation (DTCC) has provided its bank and broker customers with a detailed explanation of its Stock Borrow program and the issue of naked short selling in an effort counter a widespread campaign of distortions and misleading information." said Stuart Z. Goldstein, managing director of DTCC Corporate Communications and spokesperson for the company. The latest press release from the DTCC indicates that their position to insist on their lack of responsibility in the naked short selling scandal will continue to stand. The press release goes on to read that the DTCC's "aim is simply to correct misstatements of fact. We have confidence that our regulators, who carefully review our activities, understand that short selling is a trading strategy and is not related to the post-trade clearance and settlement process." Clearly there is a denial of accountability of who is responsible for this ongoing problem.
Confronting: Recently, EagleTech Communications issued an open letter responding to the statements posted on the DTCC website by First Deputy General Counsel Larry Thompson similar to those of Stuart Goldstein. The company believes that the Stock Borrow Program clearly leaves the door open to naked short selling, citing evidence in the 73 page Treatise entitled, Short Selling, Death Spiral Convertibles, and the Profitability of Stock Manipulation by Professor Finnerty of Fordham University. One reason is that "sellers can continue to fail to deliver because the NSCC can borrow the shares it needs to meet its clearing obligations through the stock borrow program." Another is that the stock borrow program allows the shares to be recycled. Each stock loan gives rise to another stock futures contract. Any single share could actually be relent multiple times, giving rise to multiple futures contracts." This is certainly contrary to the position that DTC Counsel Larry Thompson holds. To conclude, the company pressed the DTCC in producing Eagletech's court ordered trading records, which will clear the air in showing the truth as to how the Stock Borrow Program has negatively affected Eagletech’s publicly traded shares. However, given the historical stance of the DTCC on this issue, it will be difficult to see if any resulting actions will be taken to rectify the situation.
Avoiding: It appears that the Securities and Exchange Commission has now backed down from their former toughened stance on naked short selling. In the Securities and Exchange Commission's own words, "naked short selling is not necessarily a violation of the federal securities laws or the Commission's rules." The reasons given involve the debate over the sometimes innocent causes of failing to deliver shares or stock certificates. According to the Securities and Exchange Commission, "failures to deliver may result from either a short or a long sale. There may be legitimate reasons for a failure to deliver. For example, human or mechanical errors or processing delays can result from transferring securities in physical certificate rather than book-entry form, thus causing a failure to deliver on a long sale within the normal three-day settlement period." At first glance, it appears that the Securities and Exchange Commission will fail to take additional force to strengthen Regulation SHO. Because the Securities and Exchange Commission has now given the impression that the ongoing battle against naked short selling is nearly an allusion, it will be a long while before the best interests of investors are finally defended.
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