From: [rbitulsa]
Sent: Sunday, May 01, 2005 11:14 PM
To: 'mkrantz@usatoday.com'
Subject: Regarding your "Naked Cover up" Q&A of 4/21
Dear Matt,
When you attempt to explain the real underlying issue to average investors or the general public, it tends to soar over their heads. So we "Kleenex" the issue and call it naked shorting; counterfeit shares is even easier to understand.
But the real issue is the Stock Borrow Program's love affair with persistant settlement failures, primarily against companies trading on the lower-tier venues.
No doubt here that the SBP was created to make money, period. Yes, there was a growing number of arbitrary settlement failures, and it was disrupting the continuity of the settlement system. And that caused the DTCC to take notice. But they didn't put their heads together and create a system that prevented the delivery failures. They put their heads together and devised a system that could handle unlimited delivery failures, and created a managed and regulated process that provided equal access to this illegal profiteering, for all of its participants. It had become obvious that settlement failures were screwing up the system. And the DTCC participants asked, figuratively, "How can we profit from this?" The answer was the SBP.
Every share your broker "lends" into the SBP, to cover a delivery failure "within the system", puts cash into an account 'owned' by your broker - he can't spend the principle, but he earns the interest income on it, daily. Think about the incentive for your broker to fail delivery - the game is lending shares for cash flow, and the ticket is failed delivery. Hypothetical example: Your broker sells shares to another broker and then doesn't deliver them on T+3. Your broker then lends your shares to the buying broker via the SBP, and immediately begins to earn interest on YOUR shares. And make no mistake about it. Your shares are now owned by someone else. What you get is a guarantee from the DTCC to receive shares back (of like kind and quantity) when the originating delivery failure is settled. How do you feel knowing this? Your broker will deny it. Why? Because your broker's stock "loans" are accounted for as long shares on his DTCC records. How is this possible? Rule 11-2 Paragraph C of the NSCC Rules and Procedures: “The assumptions … of this Section for any CNS Transaction of any Member shall occur when the [DTCC’s] guarantee to complete the transaction becomes effective. For purposes of the preceding sentence, the [DTCC] shall be deemed to have guaranteed completion of a CNS Transaction when the clearance and settlement process for the transaction has reached the stage at which the [DTCC] will complete the CNS Accounting Operation for such transaction.” Your broker has given away your shares for cash-flow, and you've unknowingly received, in their place, the rights to an IOU for a share that has yet to be purchased by the person who owes it to you. Don't be mistaken. If you invest in the OTCBB or Pink Sheet stocks, someone else likely owns the shares printed on your brokerage statement.
Have you read Leslie Boni's report? It might be a year before that originating failure is delivered. The continued recycling of this process, when you compare an increasing number of settlement failures against a decreasing number of settlements, creates shareholders whose cumulative long positions, as shown in their brokerage accounts, add up to four, five, maybe ten times the actual number of shares the company has issued. Now, what percentage of ownership did you think you were paying for when you bought the stock?
You might want to get up to speed on this issue. It will monopolize the mainstream media, at some point in the near future.
Sincerely,
[rbitulsa]
